20150217 Other rating agencies should scrutinise Temasek’s reckless investing

Singaporeans have the S&P to thank for its impending downgrade of Temasek Holdings’ rating which will see Temasek in the company of Greece, Cyprus and Latvia. (Sovereign ratings list)

S&P must have conducted a thorough review to conclude the necessity of Temasek’s downgrade and there must have been many reasons.

Less than half a year ago, Temasek was rated ‘AAA’ by S&P. But Temasek’s premium rating was mostly based on PAP providing standby tax dollars during any crisis as confirmed by S&P’s “extremely high likelihood of extraordinary support from the government of Singapore”.

It is also possible that S&P could have been following political developments in Singapore and has anticipated the likely loss of PAP government support at the next election. It could also be due to the fact that Temasek has refused to be upfront with its stakeholders ie hidden information such as exorbitant annual salaries running into the tens of millions could lead to a political crisis if disclosed, it could also have invested billions in risky hedge funds, etc

Temasek is not strictly an investment holdings company and it is no longer contented with being in the business of earning peanuts in dividends, rent or interest.. Temasek has been assuming higher risks such as providing $4 billion for its subsidiary Seatown Holding Pte Ltd for shares speculation. Seatown Holdings is a hedge fund whose objective is to make a fast buck which of course entails high risks.

Temasek has been seeding hedge funds probably to the tune of $10 billion (tax dollars) by now. Such a risky investment strategy has never been debated in parliament.

Link to NASDAQ (All Seatown’s transactions are also published quarterly)

The PAP government has refused to disclose such information which is already in the public domain. It hopes to prevent citizens from scrutinising its performance.

A list of Seatown’s top 5 holdings.

A list of all stocks held by Seatown Holdings as of 31 Dec 2014 is also available at this link.

The reserves managed by Temasek do not belong to PAP but every citizen. How could the government not disclose relevant information ie risky investments, expenses, salaries, fees, etc to almost all MPs? What is Temasek attempting to conceal from the public?

Temasek has about US$10 billion outstanding bonds with coupon rates ranging from about 2.4% to 5.4%. In the event of a rating downgrade, its borrowing costs will shoot up to around 9%, the current yield on Greece’s 10-year bond. This would be about 4.5% to 6.6% higher than Temasek’s 10-year bonds, translating into a higher borrowing cost of between $45 million and $66 million per billion dollar annually.

Why should Temasek have access to low borrowing costs for very risky ventures such as hedge funds? With higher borrowing costs, Temasek will be discouraged from engaging in speculative activities.

This is a step in the right direction as it will prevent the PAP from socialising Temasek’s losses. There’s really no reason for institutions to lend to Temasek at 4.2% for 40 years to speculate in the stock market at citizens’ expense.

Unlike other fund managers, Temasek has a symbiotic relationship with the PAP. PAP has a consistent pattern of transferring national assets to Temasek at “below their real value including Singtel, SIA, DBS Bank and Changi Airport Group, which was transferred at $3 billion”. (read other posts by Kenneth J at the same link)

What would happen if Temasek starts losing money on its ‘investments’ is obvious from PAP’s track record. One example would be its 54%-owned SMRT.

Recall recently that SMRT was on the verge of becoming a penny stock half a year ago. SMRT has been extremely profitable for a PTO, having paid out more than $1 billion in dividends since its listing. More than half of the dividends went to Temasek. but when SMRT was mismanaged and had to unexpectedly cough up additional millions for maintenance, the PAP readily stepped in with an initial $1 billion lifeline, compliments of taxpayers.

By subsequently gifting SMRT billions of tax dollars, it not only helps to pad SMRT bottom line but increases the value of its shares. Without PAP’s lifeline, SMRT shares would probably be trading at least $1 from current prices. Since Temasek owns 826 million SMRT shares, its portfolio would have been reduced by almost $1 billion! Of course PAP could not have stood by and see $1 billion wiped off from Temasek’s portfolio.

What about Olam’s inexplicable share price run-up in the face of negative fundamentals? Why was Temasek allowed to offer $5.3 billion of our reserves in its bid to take over Olam with zero parliamentary oversight?  (Rating agencies had better start to take note)

Image source: Balding’s World

S&P seems to have noticed a high percentage of Temasek’s listed portfolio comprising 5% to 83% stakes of a company. This gives rise to the issue of liquidity as Temasek will not be able to raise cash in a credit crisis ie there will be few buyers with deep pockets for Temasek to offload its huge blocks of shares.

To put it in perspective, Norway’s US$840 billion Government Pension Fund Global (GPFG) held more than 5% stakes in only 45 companies in 2013. GPFG owns stakes in 8,000 companies whereas Temasek’s is only a few hundred. 5 times smaller than GPFG, Temasek has more than 5% stake in 39 companies.

Temasek had more than 5% stake in 39 companies in 2013.

. NAME %
1 MEG ENERGY CORP 5.15
2 IND & COMM BK OF CHINA-H 5.27
3 HUANENG RENEWABLES CORP-H 5.34
4 TIGER AIRWAYS HOLDINGS LTD 6.12
5 REPSOL SA 6.29
6 QUINTILES TRANSNATIONAL HOLD 6.41
7 MOSAIC CO/THE 6.54
8 YY INC-ADR 6.69
9 CHINA CONSTRUCTION BANK-H 7.44
10 CITIC SECURITIES CO LTD-H 7.46
11 NEW CHINA LIFE INSURANCE C-H 7.54
12 MARIN SOFTWARE INC 7.76
13 HUTCHISON PORT HOLDINGS TR- 10.93
14 CITIC RESOURCES HOLDINGS LTD 11.47
15 AMYRIS INC 13.67
16 SHANGHAI PHARMACEUTICALS-H 16.19
17 CEI CONTRACT MANUFACTURING 17.83
18 STANDARD CHARTERED PLC 17.88
19 LAI FUNG HOLDINGS LTD 20.01
20 KEPPEL CORP LTD 20.89
21 OLAM INTERNATIONAL LTD 24.06
22 LEVEL 3 COMMUNICATIONS INC 25.36
23 DBS GROUP HOLDINGS LTD 29.22
24 MAPLETREE INDUSTRIAL TRUST 30.08
25 CITYSPRING INFRASTRUCTURE TR 37.41
26 MAPLETREE COMMERCIAL TRUST 38.37
27 CAPITALAND LTD 39.48
28 MAPLETREE LOGISTICS TRUST 40.45
29 SHIN CORP PCL 41.62
30 SATS LTD 43.08
31 SEMBCORP INDUSTRIES LTD 49.47
32 SINGAPORE TECH ENGINEERING 50.26
33 SP AUSNET 51.05
34 SINGAPORE TELECOM LTD 51.96
35 SMRT CORP LTD 54.32
36 SINGAPORE AIRLINES LTD 56.11
37 NEPTUNE ORIENT LINES LTD 67.22
38 SAM ENGINEERING & EQUIPMENT 80.43
39 STATS CHIPPAC LTD 83.81

Temasek does not seem to have learnt from its billion-dollar losses in Barclays and Merrill Lynch. Every investor has to weigh the possible downside of an investment but not Temasek with its humongous bets. Its multibillion-dollar bets are too big to fail which must mean Temasek has not factored in the downside and sees only the upside to its investments. Why is Temasek so certain that Standard Chartered Bank and China Construction Bank will not turn out to be another UBS?

Because “extraordinary support from the government of Singapore” will always be on standby, Temasek will continue to take higher risks. The current remuneration structure has incentivised Temasek to take unnecessary risks where bad investments are easily ‘cold storaged’ for the next 2 to 3 decades. Although no director has been held accountable for unbelievable losses, accountability is still not an issue.

S&P rerating will force Temasek to review its investment strategy as its borrowing costs will spike. This will also deter Temasek from speculating with borrowed funds. All investments carry risks and Temasek has never proven itself to be an astute investor. Singapore’s family jewels were handed to Temasek on a silver platter which it then sold at a handsome profit, subsequently claiming to have made impossibly-high returns. Temasek is a joke unto itself and so there’s really no reason to lend billion$ to an inexperienced fund manager at, say, 4.2% over 40 years.

Hopefully, other rating agencies have started to take notice of Temasek’s recklessness, wild claims of investment prowess and review Temasek’s rating.

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2 Responses to 20150217 Other rating agencies should scrutinise Temasek’s reckless investing

  1. Xmen says:

    Ratings aside, the most worrisome aspect of Temasek is its willingness to take on risks when no one would venture. LTCM, AIG, Fannie Mae, Freddie Mac all did well until the music stopped and required bailout by the Fed. If Temasek’s hedge funds (or big bets) blow up, they can potentially bring it down and more. Temasek needs a different management urgently. It should emulate Norway or Berkshire Hathaway in corporate governance and forget about any get rich quick scheme.

  2. phillip ang says:

    So long as PAP is not removed, Temasek will continue to put Singaporeans’ interests at risk. Temasek is a subset of the PAP.
    Nobody is in the position to advice or make any suggestion to Ho Ching.
    “Alvin Foo(l) of the Straits State’s Times wrote a piece comparing Temasek Holdings” and Berkshire Hathaway in 2009. Conclusion – Temasek’s performance was superior!
    https://furrybrowndog.wordpress.com/2009/06/21/temasek-holdings-outperformed-berkshire-hathaway/
    There’s really no one for Temasek to emulate because it has always been the best. 😦

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