Perpetual issuance in Asia ex-Japan surges amid hot bond market

Singapore

PERPETUALS or bonds with no fixed maturity are going gangbusters amid an overall hot bond market as institutional investors join in the fray.

Historically, investors in perpetuals were mainly private-bank customers chasing yields, but of late more institutional investors such as fund managers and insurers are willing to buy these hybrid capital instruments, said Clifford Lee, DBS Bank head of fixed income.

Bond sales in Asia excluding-Japan year to May 24 at US$125.7 billion are almost double the US$64.5 billion sold in the same period last year. Sales of perpetuals have also surged as demand continues to outstrip supply, notwithstanding the jump in issuance, said Mr Lee. Corporations in Asia excluding-Japan have raised perpetuals worth US$7.36 billion this year (as at May 22), according to Dealogic data, closing in on the US$7.82 billion they issued throughout 2016.

In the first five months of 2017, Singapore companies have sold perpetuals worth S$2.77 billion, 73 per cent more than the S$1.6 billion in the same 2016 period.

Said Todd Schubert, Bank of Singapore head of fixed income research: "For the issuer, the impetus to issue perpetual bonds is the ability to lock in cheap funding for long periods of time (conceptually forever) in the early period of what is expected to be a prolonged cycle of Federal Reserve interest rate hikes."

"For investors, perpetual bonds provide some incremental yield in a low-spread environment," said Mr Schubert.

Private bank customers hungry for yield in the past have accounted for as much as 90 per cent of a perpetual issue.

Perpetuals offer higher yield, or a richer coupon, because they may never be redeemed by the issuer. Most do contain a call date though, where the issuer has the option to redeem the issue. Perpetuals are also often unrated.

Companies sell perpetuals even though they have to offer higher yield because they qualify as equity; this means the issuers are able to take on more gearing without straining their debt ratios, explained Mr Lee.

And with long-term interest rates seen as benign amid a healthy liquidity situation, institutional investors are featuring more in perpetual sales.

"As the market deepens, institutional investors are beginning to invest quite meaningfully in the perpetual space," said Mr Lee.

Mapletree Investments sold two perpetuals - S$625 million in January and and S$700 million in May - and allocations to institutional investors were 44 per cent and 32 per cent respectively.

Institutional investors took 55 per cent of Trafigura Group's US$600 million perpetual in March while they accounted also for 55 per cent of Hotel Properties' S$150 million perpetual in May.

"Investors are looking at perpetuals as higher-yielding instruments from an issuer they are already comfortable with - credit-wise," said Mr Lee.

Aaron Gwak, Standard Chartered Bank head of capital markets, Asean, noted that the recent rate hikes have affected only short-term rates.

Following the March rate hike, the market continues to expect another rate hike in June, with current probability at 77 per cent but the recent rate hike trends have affected only short-term rates, he said.

"Long-term rates, however, have remained range-bound over the course of the last two rate hikes," he said. Ten-year US Treasuries are at 2.235 per cent overnight (May 24), which is comparable to where they were right after the US elections last November, at 2.151 per cent, said Mr Gwak.

"This is the main reason why investors are in favour of perpetual instruments. They view that long-term rates will continue to be range-bound in spite of rate hikes to come," he said. "This is pushing investors to deploy the accumulated capital in their arsenal. And given the yield proposition set forth by perpetual, it is unsurprising that this asset class is doing well."

Rated perpetuals, in particular, are gaining a lot of favour as they provide the added comfort of rating agencies' review on the issuer and the structure, he said.

Devinda Paranathanthri, UBS Asia credit strategist, said he sees value in corporate perpetuals, but is very selective depending on their coupon features.

"We prefer structures where there is a coupon step-up or a reset at the call dates. These offer some protection against rising interest rates, in our view. When rates are rising, fixed-for-life structures will likely be affected the most," he said.