Perpetual bonds back in favour

Singapore

PERPETUAL bonds are enjoying a massive revival as investors turn to them for their higher yields, ignoring the broader market anxiety over rising interest rates.

On Wednesday, Ezion Holdings sold S$150 million perpetual bonds offering a 7 per cent coupon, the eighth such deal this year. The issue received S$300 million in orders.

This brings the amount raised by perpetuals so far this year to S$1.825 billion - a far cry from just two deals worth S$400 million for the whole of 2013, when the fixed-income market was roiled by interest rate volatility due to quantitative easing (QE) tapering fears.

"Sentiment in the bond market has remained generally positive for some time now. So perps from appropriate issuers are once again welcome in the market as investors go on a quest for higher-yielding paper," said Clifford Lee, DBS Bank head of fixed income.

The typical investors for perps - so called because they have no set maturity - are private bank clients as the minimum order is S$250,000. But many perps do have a call date and a step-up interest rate - which means that if the bonds are not redeemed then, the issuer will pay a higher coupon. With the call date, perps are often regarded as medium-term investments; at least that's how they are usually marketed, although there is no guarantee of redemption.

Ezion's perps are NC4 or non-call four; this means the issuer will not redeem the bonds for at least four years. If no redemption takes place then, the coupon is reset in Year 4 based on a benchmark, plus 300 basis points.

Private bank clients made up 87 per cent of Ezion's deal, giving them a constant income stream at a princely 7 per cent for the next four years. This contrasts with a 12-month fixed deposit interest rate of 1.25 per cent from CIMB Bank.

Said Aaron Gwak, Standard Chartered Bank's head of debt capital markets, Asean: "Investor interest in perpetuals stems mostly from private banking clients who seek higher returns in a low-rate environment, for a medium-term instrument until the first call date."

Of course, not all perp deals pay 7 per cent but strong credits offering lower coupons have been snapped up like hot cakes, with institutional investors joining the chase.

Blue-chip Frasers Centrepoint Ltd (FCL), which sold S$600 million perps in September, met with such strong demand that its order book was almost six times, reaching S$3.5 billion. This allowed the company to price at 4.88 per cent, lower than the initial guidance of 5 per cent. FCL was also this year's biggest perp deal.

Corporates and banks accounted for 42 per cent of the FCL issue, followed by private banks at 40 per cent and fund managers/insurers, 18 per cent.

Tata International's S$150 million which was sold towards the end of last month - one day after the US Federal Reserve said that its bond-buying programme had ended - received S$1 billion in orders. Again, the coupon was scaled back to 6.65 per cent from the initial 7 per cent guidance.

Since then, the Tata perps have continued to rally; on Wednesday, they were quoted at between S$102.182 and S$102.625, taking the yield down to about 6.1 per cent. The perps were sold at S$100. Bond yields fall when prices rise, and vice versa.

"Brand-name familiarity plays a part, and well-structured perpetual transactions from well-known, household names such as Tata International should continue to enjoy a robust response, assuming markets remain conducive," said Jason Khoo, HSBC head of debt capital markets, Southeast Asia.

Bond prices overall continue to rise amid expectations that interest rates - when they begin to climb some time next year - will increase in baby steps due to uneven global economic growth and low inflation. Central banks raise interest rates to tame inflation.

On Wednesday, the International Monetary Fund warned of downside risks to its growth projections for the eurozone, and urged the European Central Bank to act if consumer prices continue to drift lower. The United States also stepped up calls on European policymakers to do more to avoid a "lost decade" of low growth, reported Reuters.

The Markit iBoxx SGD corporate total return index touched a fresh high of 110.54 on Wednesday, up 5.9 per cent from a year ago.

Year-to-date SGD bond issuances have reached S$22.14 billion. Issuances in 2013 totalled S$19.8 billion.