Singapore corporate perpetuals weaken; analysts see market holding up for stronger issuers

SINGAPORE’S corporate perpetuals have weakened in the aftermath of Credit Suisse’s debt wipeout, but not by much. Market watchers do not expect the impact to be long-lasting, and said corporates should still be able to tap the perpetual credit market – albeit at higher rates and under tougher scrutiny.

“In terms of second-order impact to the Singapore corporate perpetual market, so far the main impact is on secondary prices, where market participants have become more defensive, leading prices to drift down somewhat,” said Ezien Hoo, credit research analyst at OCBC .

She added that there has not been a significant contagion from the banking space into the non-bank corporate sector, possibly because investors, traders and other market participants are aware that corporate perpetuals are different from Additional Tier-1 (AT1) bonds.

Singapore corporates also tend to be much less levered, having a stable funding base and operating conditions, Hoo said. She expects their credit fundamentals to hold up, so corporate perpetuals should trade normally.

AT1 bonds, also known as contingent convertible bonds, were created after the 2008 global financial crisis, to ensure that bank losses would be borne by investors and not taxpayers. Under international banking rules, an AT1 capital instrument must be perpetual in nature, meaning it has no maturity date.

Such bonds have come under the spotlight because the proposed acquisition of Credit Suisse by rival bank UBS would trigger a complete write-down of the value of Credit Suisse’s US$17 billion in AT1 bonds.

The atypical order in which they would be wiped out – before shareholders – has spooked markets and sparked a sell-off in other bank debt.

Robert Hong, StoneX Financial’s head of fixed income for credit in Asia, has not seen a direct impact on non-AT1 corporate perpetuals in general. The market sentiment has recovered somewhat, even as the “damage has been done” to the AT1 market.

“The local perpetuals are not as visible or transparent, but I suspect (it is) because it’s fairly contained with local banks and players. The downside probably is rather limited,” he said.

The market for new issues, however, may take a hit.

Shawn Sng, a research analyst at Phillip Securities Research, said strong corporates should have no need to shy away from issuing perpetuals.

“Companies with robust financial health, sound capital management and clarity on their revenue stream can still provide perpetual bonds with yields that may be attractive to investors,” he said. “These positive factors can also give investors the conviction and confidence that is needed to hold the perpetuals of these companies.”

But there could be tougher scrutiny of issuers as well as an increased cost of funding.

Said Lim Teng Chong, a senior research analyst for global fixed income at Bondsupermart: “They would have to issue the bond at a much higher coupon rate in order to draw interest. We should see a sharp decline in perpetual issuances for the time being, as market confidence and appetite for perpetual bonds fall.”

StoneX’s Hong said investors would likely be analysing what they own in their books, including scrutinising more closely the terms and treatment in each jurisdiction. “I think the caution will probably come, at first, more from the investors rather than the issuers. The activity on the capital markets will probably take a bit of a pause in terms of issuing and investing in this type of security.”

The scrutiny might result in a delineation between the better issuers and the weaker ones. “Probably the best names will be able to access the market once the overall market sentiment turns because... to some extent, it’s also a market confidence issue, not just a fundamental issue,” said Hong.

Sng of Phillip Securities Research said that perpetuals are still a viable option for investors. He added, however, that investors need to understand perpetuals before investing in them. Notably, they should know that the issuer has the right to stop coupon payments.

Hoo of OCBC also highlighted that perpetuals typically rank lower than senior bonds.