Why is perpetual bonds good for issuers and bad for you and me? You can read more about perpetual bonds at this URL...
In general, when you buy perpetual bonds, you are buying something similar to "shares", but yet without the liquidity in trading these perpetual bonds like shares, and the perpetual bonds are yet treated like shares by Monetary Authority of Singapore (MAS) and companies can issue as many units of perpetual bonds as they like without making their balance sheet appears too much in debt (when in fact they would have if they have treated perpetual bonds as debts just like the other "bonds"!).
Also, perpetual bonds are the lowest ranking among all bonds, and the coupons payments are not guaranteed and issuers can choose not to pay the coupons, and these coupon payments are not cumulative.
So in summary, when you buy perpetual bonds, you are buying something like shares, yet without the liquidity of trading it like shares (you may never be able to sell them at a reasonable price!), and without the opportunity to participate in price appreciation like shares.
Similarly, when you buy perpetual bonds, you are buying something like bonds, yet without all the benefits that come with real bonds!
So, you are better off buying shares or bonds if you prefer the former or the latter, but don't buy perpetual bonds!
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Property Nuggets: A closer look at perpetuals
What’s New
• Mapletree Logistics Trust (MLT) is the first S-REIT to issue perpetual securities (perpetuals), raising S$350m at an interest rate of 5.375%.
• Our view is that this form of fund raising is generally positive for REITs if used to finance accretive acquisitions, but would be expensive to replace debt.
• We anticipate that this may be the beginning of more such issuance to come and highlight some of the implications for REITs.
Essentials
• Avoiding additional leverage. The Monetary Authority of Singapore’s (MAS) guidelines allow REITs to account for perpetuals as equity, as opposed to debt, thus reducing aggregate leverage when used to finance acquisitions. However, credit rating agencies do treat these hybrid securities as 50% debt/ 50% equity in calculating leverage, and excessive levels of perpetuals would trigger a credit downgrade.
• More competitive than equity fund-raising. Given that the cost of debt for REITs ranges from 2-4%, 5-5.5% perpetuals would be an expensive replacement for debt. However, when matched against the cost of equity at between 6-9% for REITs, perpetuals can be a viable alternative to raising equity.
• Essential to acquire properties with funds raised. Due to their costs, REIT managers should only issue perpetuals to fund acquisitions, and our view is that the issuance of perpetuals is a market signal that sizeable acquisitions are forthcoming. REIT managers would likely take care to closely match the timing of acquisitions and the issuance of perpetuals due to their high holding costs.
• Higher likelihood of being used by industrial and hospitality REITs due to higher acquisition NPI yields for industrial (6.5-8.5%) and hospitality (6-6.5%) properties compared against lower NPI yields for office (3.5-4.5%) and retail (5- 6%) properties. This would enable acquisitions financed through the perpetuals to be DPU-accretive to ordinary unitholders. Perpetuals could also be used to fund overseas acquisitions, especially in countries where the cost of debt is high, such as Australia, although this exposes the REIT to exchange rate risk.
• Risk is in fixed payments and higher priority vs ordinary unitholders. The main risk for REITs is in the fixed payout for the perpetuals, which would not change due to shifts in occupancies or rentals. Holders of perpetuals would also rank higher in priority than ordinary unitholders, but would not enjoy potential dividend growth in the longer term.
Action
• Larger REITs with higher exposure to the industrial and hospitality sectors are likely to issue perpetuals to fund yield-accretive acquisitions. Top picks include Ascott Residence Trust, MLT and Mapletree Industrial Trust.
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Showing posts with label perpetual bonds. Show all posts
Showing posts with label perpetual bonds. Show all posts
Friday, September 26, 2014
Sunday, September 21, 2014
Perpetual bonds rush causes alarm in Singapore
This is a note of warning on perpetual bonds, a follow-up to my previous post warning on "So my advise is, never ever invest perpetual bonds!" I think perpetual bonds is more dangerous than properties in Singapore!
You can read the following alarm regarding perpetual bonds rush in Singapore at this URL...
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Perp rush causes alarm in Singapore
Mon, May 14 2012
By Kit Yin Boey
SINGAPORE, May 14 (IFR) - The unprecedented run of perpetual bond sales in Singapore's local market has caught the attention of the city state's regulators.
The Monetary Authority of Singapore is growing concerned about the number of potentially risky bonds that have ended up in the hands of individual investors. Bankers said MAS officials had voiced their concerns over retail holdings of perpetual bonds during at least two informal meetings in recent weeks.
The central bank's scrutiny is preliminary, and there is no suggestion of any wrongdoing on the part of the banks or companies involved in the recent flurry of perpetual bond issues.
But the discussions show that the regulator is worried that individual investors may be taking on too much risk - or buying securities without a full understanding of the product.
More perpetual bonds were sold in Singapore in the first three months of 2012 than in the previous decade and a half.
The product offers companies the tantalising opportunity to raise funds with no dated maturity, typically winning some equity treatment under accounting rules and avoiding any impact on gearing ratios.
The higher coupons are attractive for investors in a low interest-rate environment, but the notes come with high duration risk since there is no guarantee of repayment.
Companies including Singapore Post, Mapletree Logistic Trust and Temasek-backed Olam International sold perpetual bonds earlier this year, lifting perpetual sales to S$3.1bn (US$2.5bn) in the first quarter.
A large proportion of those deals went to private banks, investing on behalf of individual clients.
MAS's focus, however, has sharpened since Genting Singapore offered S$500m to the public, giving the retail public the chance to invest via the automated teller machines of the city's local banks.
The retail offering was only the second such offering of perpetuals, with Hyflux being the first to do so when it launched the first corporate perpetual issue in April last year.
The problem with ATM machines is that, unlike stocks or other structured investment products sold over the counter, investors have no access to advisory services that can point out risks.
Retail investors are supposed to read the prospectus, but in practical terms no arranger can guarantee that they have done so.
For the moment, bankers said they have not been told to pull back from retail offerings of perpetual, nor have they heard of any suggestion that MAS would be making recommendations for selling agents to protect investors in such sales.
But the chatter that the central bank is keeping an eye on the retail market may prompt underwriters to take a more cautious approach on any future retail offerings.
"I won't be surprised if MAS would be watching the developments in this space, as they have always been careful with products that are sold to the public," said one local banker.
Memories of Lehman
The MAS has been extremely cautious on the sales of structured investment products ever since the Lehman structured products collapsed in the global financial crisis.
That episode, which caused a huge public outcry, saw 8,000 individual investors, including retirees, losing a chunk of a combined S$508m of investments in Lehman-linked structured notes from nine banks and brokerages in Singapore.
Since then, the central bank has put in place several policies that have increased investor protection.
"After the Lehman debacle, I don't think MAS can afford to drop another ball," said another local banker. "So, it is only right that they should watch that retail investors are protected in the perpetual offerings. There are, after all, a lot of risks in such instruments."
Compared with straight vanilla bonds, perpetual securities often allow coupon deferrals, although this usually means the issuer also cannot declare dividends, and some include non-cumulative features as well.
And, as the name suggests, the bonds are perpetual and issuers have the right not to exercise a call option, which means investors may not see the return of their principal investment.
The critical point for retail investors is that they have no recourse if the issuer decides not to call. This risk is all too real, as events in the US over the past two weeks showed. Well known US banks JP Morgan and Bank of America decided against making their respective calls on their Lower Tier 2 bonds, raising the ire of bondholders who had traded the paper as five-year notes.
Margin calls
Any similar development in the Singapore perpetual paper in four to five years time will have a rippling effect on other outstanding perpetuals.
Local bankers said the risks have been escalated because private bankers, the main takers of the recent perps, were buying on the margin - sometimes using leverage granted by the lead managers themselves.
Some purchases were done on 100% margins, said one foreign banker.
The MAS's concerns come amid talk that that more Singapore and foreign issuers are exploring perpetual bond sales - although most are expected to target the institutional market.
Hong Kong conglomerate Hutchison Whampoa has been repeatedly linked with a return to the Singapore dollar metks, and local conglomerate Keppel Corp was heard to be hunting for arrangers for a perpetual.
Keppel, however, is said to have demanded hard underwritten bids, and bankers - worried that the market is already full - may be reluctant to stick their necks out that much.
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You can read the following alarm regarding perpetual bonds rush in Singapore at this URL...
------------------------------------------
Perp rush causes alarm in Singapore
Mon, May 14 2012
By Kit Yin Boey
SINGAPORE, May 14 (IFR) - The unprecedented run of perpetual bond sales in Singapore's local market has caught the attention of the city state's regulators.
The Monetary Authority of Singapore is growing concerned about the number of potentially risky bonds that have ended up in the hands of individual investors. Bankers said MAS officials had voiced their concerns over retail holdings of perpetual bonds during at least two informal meetings in recent weeks.
The central bank's scrutiny is preliminary, and there is no suggestion of any wrongdoing on the part of the banks or companies involved in the recent flurry of perpetual bond issues.
But the discussions show that the regulator is worried that individual investors may be taking on too much risk - or buying securities without a full understanding of the product.
More perpetual bonds were sold in Singapore in the first three months of 2012 than in the previous decade and a half.
The product offers companies the tantalising opportunity to raise funds with no dated maturity, typically winning some equity treatment under accounting rules and avoiding any impact on gearing ratios.
The higher coupons are attractive for investors in a low interest-rate environment, but the notes come with high duration risk since there is no guarantee of repayment.
Companies including Singapore Post, Mapletree Logistic Trust and Temasek-backed Olam International sold perpetual bonds earlier this year, lifting perpetual sales to S$3.1bn (US$2.5bn) in the first quarter.
A large proportion of those deals went to private banks, investing on behalf of individual clients.
MAS's focus, however, has sharpened since Genting Singapore offered S$500m to the public, giving the retail public the chance to invest via the automated teller machines of the city's local banks.
The retail offering was only the second such offering of perpetuals, with Hyflux being the first to do so when it launched the first corporate perpetual issue in April last year.
The problem with ATM machines is that, unlike stocks or other structured investment products sold over the counter, investors have no access to advisory services that can point out risks.
Retail investors are supposed to read the prospectus, but in practical terms no arranger can guarantee that they have done so.
For the moment, bankers said they have not been told to pull back from retail offerings of perpetual, nor have they heard of any suggestion that MAS would be making recommendations for selling agents to protect investors in such sales.
But the chatter that the central bank is keeping an eye on the retail market may prompt underwriters to take a more cautious approach on any future retail offerings.
"I won't be surprised if MAS would be watching the developments in this space, as they have always been careful with products that are sold to the public," said one local banker.
Memories of Lehman
The MAS has been extremely cautious on the sales of structured investment products ever since the Lehman structured products collapsed in the global financial crisis.
That episode, which caused a huge public outcry, saw 8,000 individual investors, including retirees, losing a chunk of a combined S$508m of investments in Lehman-linked structured notes from nine banks and brokerages in Singapore.
Since then, the central bank has put in place several policies that have increased investor protection.
"After the Lehman debacle, I don't think MAS can afford to drop another ball," said another local banker. "So, it is only right that they should watch that retail investors are protected in the perpetual offerings. There are, after all, a lot of risks in such instruments."
Compared with straight vanilla bonds, perpetual securities often allow coupon deferrals, although this usually means the issuer also cannot declare dividends, and some include non-cumulative features as well.
And, as the name suggests, the bonds are perpetual and issuers have the right not to exercise a call option, which means investors may not see the return of their principal investment.
The critical point for retail investors is that they have no recourse if the issuer decides not to call. This risk is all too real, as events in the US over the past two weeks showed. Well known US banks JP Morgan and Bank of America decided against making their respective calls on their Lower Tier 2 bonds, raising the ire of bondholders who had traded the paper as five-year notes.
Margin calls
Any similar development in the Singapore perpetual paper in four to five years time will have a rippling effect on other outstanding perpetuals.
Local bankers said the risks have been escalated because private bankers, the main takers of the recent perps, were buying on the margin - sometimes using leverage granted by the lead managers themselves.
Some purchases were done on 100% margins, said one foreign banker.
The MAS's concerns come amid talk that that more Singapore and foreign issuers are exploring perpetual bond sales - although most are expected to target the institutional market.
Hong Kong conglomerate Hutchison Whampoa has been repeatedly linked with a return to the Singapore dollar metks, and local conglomerate Keppel Corp was heard to be hunting for arrangers for a perpetual.
Keppel, however, is said to have demanded hard underwritten bids, and bankers - worried that the market is already full - may be reluctant to stick their necks out that much.
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Thursday, August 28, 2014
Doing yourself great disfavor to invest in perpetual bonds!
Recently, perpetual bonds issuance by companies have been the rage. What is so good for these companies getting such dirt cheap perpetually long-term forever financing, obviously is very detrimental for you and me!
So my advise is, never ever invest perpetual bonds!
If you understand how perpetual bonds operate, you would never want to "invest" in such bonds!
So my advise is, never ever invest perpetual bonds!
If you understand how perpetual bonds operate, you would never want to "invest" in such bonds!