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Saturday, April 19, 2008

Buying ‘subprime’ assets at good discount

Investors are looking for bargains in battered down subprime assets

WHEN the stock market is in a side-way or down trend, buying equities can be a challenging task and retail investors will most likely not make money buying shares.

With the subprime crisis hitting the US and other developed countries, some investors are looking for bargains in battered down subprime assets selling at vast discount to their face value.

Can ordinary retail investors get a chance to buy “subprime” assets at a fraction of their face value in Malaysia?

The answer to the above question is yes.

In Bursa Malaysia, there are some securities known as redeemable loan stocks that are listed.

These loan stocks are usually listed as a result of a debt restructuring exercise as companies in good financial health do not usually list their redeemable securities.

Due to the peculiar nature of the birth of such listed redeemable securities, these loan stocks are usually held by financial institutions.

As such redeemable securities are generally issued by companies in a weak financial position, these assets can be considered “subprime”.

But most, if not all, of these securities are secured by some assets of the companies which issued them.

This mitigate the risks of such securities if the assets value held as collaterals by the trustee of these loan stocks is equal or higher than the nominal value of the loan stocks. Even if the secured assets value is lower than the nominal value of the loan stocks, such securities may be worth investing if investors can get these assets at a good discount.

So, when can we get these loan stocks at good discounts?

As the holders of these securities are mostly financial institutions which ended up with these papers in a debt restructuring exercise, investors have an opportunity to buy them when some of these financial institutions decide to cut loss and sell these loan stocks in the market.

With not many investors aware of the properties of such assets, the financial institutions would have to sell them down to a good discount level to attract buyers.

If investors are alert to such “loan stock grand sales”, there are ample opportunities to make relatively safe money by buying such loan stocks at a fraction of their face value.

Among listed redeemable securities which had been through a fire sale are the redeemable securities of Aliran Ihsan Resources Bhd (AIRB-LA), Dutaland Bhd (Dutalnd-LB), South Malaysia Industries Bhd (SMI-LA) and Mithril Bhd (Mithril-LA).

These loan stocks had traded in between 30% and 70% below their nominal value during the fire sales by financial institutions and were available in good volume. Now, such loan stocks are believed to have been picked up by savvy investors and are not available in reasonable amount even if the discount is still there.

Just a few months ago, SMI-LA was sold down heavily to about 40% of its face value.

The company has just suspended the loan stocks temporarily to facilitate a partial redemption of SMI-LA.

For the portion of loan stocks being redeemed, investors are getting RM1 for what they could have got for 40 sen.

Even though this redemption is just for 20% of outstanding amount on a proportionate basis, the company has in the past partially redeemed this loan stock a few times.

If the redemption continues, and it appears that the company can redeem most if not all of the loan stocks, investors who got it cheap would have made a very handsome return on investment.

We do not know when another financial institution is going to do a fire sale of redeemable loan stocks.

When that happens, there is typically a window of a few days for savvy investors to pick them up cheap. So, just be prepared for such opportunities.

·Alan Voon is a warrant specialist. He can be reached at or

By The Star

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