Our classification of bonds
Most bond investors look at bond ratings to define the risk of the bonds.
We had created my own sets of theory for bond issuers. Tier 1 being the safest and tier 5 being the riskiest.
Tier 1: Issuer that has cash & cash equivalent > total debt.
Example: Genting, Aviva, JD.com, Alibaba.
Tier 2: Issuer that has more debt than cash, but issuer has cash reserved for the near term bond redemption.
Example: Hok Fok Holdings.
Tier 3: Issuer that has more debt than cash, but generating healthy free cashflow and low debt/equity.
Example: Global Logistics Properties, Prudential PLC, eBay.
Tier 4: Issuer that has high debt but generates positive free cash flow.
Example: Discovery Communications, Citigroup, Bank of America, JP Morgan.
Tier 5: Issuer that has high debt and generates negative free cash flow.
Example: Hyflux, Olam.
Hence if tier 1 & tier 3 are paying the same yield, we will choose tier 1 bond.
We will always try to avoid tier 5 bonds unless they have a strong parent.
We had created my own sets of theory for bond issuers. Tier 1 being the safest and tier 5 being the riskiest.
Tier 1: Issuer that has cash & cash equivalent > total debt.
Example: Genting, Aviva, JD.com, Alibaba.
Tier 2: Issuer that has more debt than cash, but issuer has cash reserved for the near term bond redemption.
Example: Hok Fok Holdings.
Tier 3: Issuer that has more debt than cash, but generating healthy free cashflow and low debt/equity.
Example: Global Logistics Properties, Prudential PLC, eBay.
Tier 4: Issuer that has high debt but generates positive free cash flow.
Example: Discovery Communications, Citigroup, Bank of America, JP Morgan.
Tier 5: Issuer that has high debt and generates negative free cash flow.
Example: Hyflux, Olam.
Hence if tier 1 & tier 3 are paying the same yield, we will choose tier 1 bond.
We will always try to avoid tier 5 bonds unless they have a strong parent.
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