Martin Lee @ Sg
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MAS Raises Concerns About Perpetual Bonds

I’m finally fully recovered from my HFMD and would like to thank everyone for all your well wishes. ๐Ÿ™‚

I would like to resume normal posting activities today by highlighting this recent article warning about perpetual bonds.

perpetual bondsThe spate of sale of perpeture bonds to the public in this year has MAS raising some concerns about them.

Companies like Singapore Post, Mapletree Logistic Trust and Olam had sold perpetuals earlier this year, with some being sold to individuals via private banks. It was mentioned that some of the private banks had even offered leverage facilities to their clients in order to enhance the yield on the perpetuals.

Genting, on the other hand, had sold perpetuals directly to retail investors via a public offering.

One point of contention that some people have raised up was that perpetual bonds are not really normal bonds, and the use of the word “bond” can be misleading.

If you look at the offering document of Genting, the terms “perpetual bonds” do not even appear at all. Instead, they are referred to as “perpetual securities”. The loose use of the word “perpetual bonds” might have led many to believe that they function as normal bonds. But one key difference is that unlike a normal bond, a perpetual security (as it should be rightfully called), has no maturity date. For some of them, the yearly payout can even be deferred.

This reminds me of the debacle back in 2008 when the so-called Minibonds (which is anything close to a bond) exploded.

Of course, perpetuals are very different from Minibonds. One of their major risk would be the interest rate risk. Having no maturity date, their prices in the secondary market could be very adversely affected if there is an increase in the interest rate.

And then I read (with horror) that some of the REITs are considering issuing perpetuals to raise capital. This would surely be financial engineering at its best as perpetuals are not considered as debt on the balance sheet and it would allow REITs to circumvient rules regarding their gearing limits.

Leave a Comment:

Mr X says 8 years ago

Hi Martin,

You’ve brought up some good points. Just an add on, not only is the word “bond” misleading, the term “perpetual” is inaccurate and potentially more damaging in distorting pricing vis-a-vis risk.

I understand from the prospectus of some of the recent issuances that the instruments have call back provisions by the issuer after a certain period of time (usually 5 – 7 years), there is nothing perpetual about them.

Investors could potentially be a the wrong end of the stick as timing advantage is stacked in favor of the issuers. If general interest rates / risk premium rises in the future, issuers get to enjoy continued cheap funds while investors get stuck with a deppreciated security value. Coversely if interest rates / risk premium falls further, the issuer is at liberty to call back such securities at face after moratorium period and reissues a new set of securities at even lower yields to the market.

While such a mechanism is quite prevalent in the bond market, they are not marketed as “perpetual bonds” and maturity dates, option to call and/or put at various junctures are clearly stated upfront.

Peter says 8 years ago

Hi Martin,
Appreciate if you could tell me is there any difference between perpertual security (bond} and a preference share ? I am not quite clear with definition as I read somewhere preferred or preference shares are perpertual bonds.
I read yesterday ST, page 34 of INVEST. It said “It is harder to sell a perpertual security than a common or preference share. ” So it impled that preference share is different from perpertual bond. Under what category then is “UOB 5.05%NCPS 100”. This Non cumulative non convertible Preference Share is this a Perpertual Security? Thank You.


Nuts says 8 years ago

The fact that they are officially not treated as debt on the balance sheets should tell you something. Perpetual bonds should be treated as cumulative preference shares at best. By encouraging colloquially the entire S’pore to treat it as bonds, this serves to purposely lower their inherent risk and to lower the interest rate that otherwise will be demanded of such shares. Long term interest rates are at their lowest in 100 years. Any increase in long term interest rates will result in capital losses in such shares e.g. 1% increase in long-term rates = 10% drop in prices. Such shares will only do moderately well if there is a major recession or Great Depression 2 AND the company doesn’t go bankrupt.

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