Some of my clients are excited about DBS Preference Share recently and they are asking for my opinion. After talking to them, I realized that most of them might have a wrong impression about what is being offered.
Some backgrounds, DBS is offering as much as S$500 million preference shares to retail investors with a fixed dividend rate of 4.70% a year. The payout is made twice a year. It is non-cumulative, non-convertible and non-voting preference shares callable in 2020. Given the current near zero interest rate in the banks, it appears to be a attractive offer to many conservative investors.
However, investor must take note preference share is bond alike but it is NOT a bond.
First of all, forget about the very remote possibility of DBS being liquidated, in normal situation, the dividends are Fixed but NOT GUARANTEED, in DBS Preference Shares Offer Information Statement (page 28), it says
If the financial condition of DBS Bank were to deteriorate, DBS Bank could suspend dividends under the Preference Shares, and investors would not receive such dividends or other payments. Investors should not assume that unfavourable market or other conditions or events will not harm the financial condition of DBS Bank.
Secondly, “Non-Cumulative” means if DBS does not make a dividend payout, it does not have to make up for this later when it is able to do so. “Non-Convertible” means you cannot convert your preference shares into ordinary shares. Investors also do not have voting rights.
Thirdly, Investors should also beware that the preference shares are expected to be listed on the Main Board of the Singapore Exchange Securities Trading Limited from 23 November 2010, and will be traded in board lots of 100 preference shares.
Let’s be reminded that in 2008, investors who have bought OCBC Bank Preference Shares and United Overseas Bank preference shares have suffered paper losses on their investments as they crashed below issue price when Lehman Brothers failed a few months later.
Do ask yourself if that happens again, would you be able to bear the pain and hold the shares till the maturity.
Above all, as I always stressed, every product has its merit. The important thing is if the investors can purchase the one which is suitable for them.