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. 🙂

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

The 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.