Frankly Speaking: Tex Cycle’s risky debt investment

TheEdge Mon, Mar 11, 2024 11:00am - 2 months View Original

This article first appeared in The Edge Malaysia Weekly on March 11, 2024 - March 17, 2024

Tex Cycle Technology (M) Bhd is one of the few listed scheduled waste disposal specialists that have remained profitable even during the tough times of the Covid-19 pandemic.

The steady business has allowed the company to build a decent balance sheet. At the end of 2022, the company had total assets of RM161 million against total liabilities of RM36 million. Among its assets are cash of RM9.8 million and investments in unit trusts amounting to RM12.8 million.

In the latest development, the company subscribed to a RM10 million perpetual bond that was issued earlier this week. This is the second tranche of RM10 million perpetual bonds that the company has subscribed to, with the first subscribed on Feb 7.

Tex Cycle stated that the first tranche was issued by Chin Hin Group Bhd. The second tranche, issued on March 7, is also believed to be by Chin Hin.

Chin Hin Group and its subsidiaries are principally involved in property development, construction, manufacturing and trading of building materials. The group has stakes in other listed companies such as Ajiya Bhd and Signature International Bhd.

Tex Cycle has a history of investing its excess funds in low-risk unit trust schemes that offer returns of 2.5% to 7%. But the company always has the option to redeem the units. Tex Cycle justifies its investments in the five-year perpetual bonds to the coupon rates of 7.5% per annum.

But perpetual bonds do carry some risks as it is also deemed as debt in perpetuity. This is because there is no “Put Option” on the bonds. There is only a “Call Option” that lies with the issuer.

In Tex Cycle’s case, the company cannot opt to redeem the debt paper after five years. The issuer has the prerogative to extend the tenure by paying a higher coupon rate.

Given the conditions, why put money in such bonds?

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