As an example of some of things you should consider when you wish to invest in preference shares, I will be giving a summary of one of the preference shares that OCBC has issued in July 2008 and that is the OCBC Class B 5.1% Non-Convertible Non-Cumulative Preference Shares.
This preference share is currently trading in SGX under the symbol, OCBC Bk NCPS 5.1% 100. The trading symbol itself can reveal a lot of details. OCBC Bk simply stands for OCBC Bank while NCPS stands for non-cumulative and non-convertible preference shares. As mentioned in my earlier article on preference shares, non-cumulative means the dividends that were not declared and not paid in the previous financial year will not be accumulated to the next financial year while non-convertible means there is no option for the preference shareholders to convert their preference shares to ordinary shares. The 100 at the end of the trading symbol means that the lot size is 100 shares i.e. 1 lot is equal to 100 shares as compared to the usual lot size of 1 lot is equal to 1000 shares.
I have attached the brochure for the preference shares and a snapshot of the summary of the details for this preference shares.
The following are some of the issues that you should consider.
1. Perpetuity
One of the main issue for preference shares is that it will never mature unless the issuer which in this case, OCBC Bank decides to redeem it back. Notice that it is stated very clearly that OCBC Bank may, at its option, redeem in whole but not in part the preference shares on 29 July 2013 or on each dividend date after 29 July 2013. As compared to bonds, the issuer has the obligation to redeem it back. So what happens if you wish to cash your preference shares out after holding it for quite a long time ? Either you can wait for OCBC Bank to redeem it back or try to sell it on SGX but that brings me to my second issue,
2. Liquidity
Due to the small quantity of preference shares that are issued generally, preference shares usually have poor liquidity and that pose a problem. Firstly, there may not be buyers who wish to buy your preference shares if you need to sell it and even if there are buyers, their buying price may not be that favorable i.e. the spread which is the difference between the buying and selling price can be rather far apart. That will definitely put you at a disadvantage.
3. Dividends
Do take a closer look on how much dividends they are issuing and whether it will remain the same. For the OCBC Bk NCPS 5.1% 100, it is clearly stated that the dividend is 5.1%. However, another preference share that was also issued by OCBC Bank in August 2008 i.e. OCBCCap 5.1% NCPS 100 has a different dividend policy. The dividend policy is such that on or before 20 September 2018, the dividend is 5.1%. However, after this date, the dividend is pegged to the 3-Month Singapore Swap Offer Rate plus 2.5% and that to me is a big difference. That would mean that the amount of dividends will fluctuate subsequently.
To conclude, do take note of the above issues that I mentioned if you wish to invest in preference shares. The best thing one can do is to read the prospectus thoroughly and understand what you are investing in.
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