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Prudential's perpetual issue takes in over US$11b orders: source
PRUDENTIAL plc's US dollar-denominated perpetual sale on Tuesday is said to have received orders of over US$11 billion.
Due to the massive orders, the pricing of the coupon of the fixed-for-life NC5 perpetuals was lowered to 5.25-5.375 per cent, said a source. It had begun selling in the morning with an initial guidance price of 5.75 per cent.
Fixed-for-life means that the interest rate for the perps will never change and NC5 or non-call 5 means that the issuer will not call or redeem the perps before year five.
"It's quite impressive to be taking in 11 billion," said Terence Lin, assistant director of bonds and portfolio management in iFAST Corporation.
Mr Lin in fact had not recommended the deal and told investors to give the issue a miss.
"We were coming from the prospective of individual investors, who may not have long dated liabilities to match to such an asset (which could potentially be very long-dated)," he said.
The structure of the issue is to benefit Prudential, in that if interest rates go down, the issuer can redeem the perps, and if interest rates go up, the price of the perps could fall and bondholders can end up losing money, he said.
Typically, prices of bonds fall when interest rates rise and vice versa.
While the coupon rate appears attractive, the structure of the new fixed-for-life perp NC5 means that investors accept a large degree of interest rate risk (Prudential doesn't have a good track record of calling back perpetual debt), he said.
If interest rates decline, there is also the risk that Prudential will call the bonds back and refinance the issue with cheaper debt, he said.
"Investors in the bonds should be hoping for a 'goldilocks' situation where interest rates don't rise or fall too much from current levels - we would suggest that investors give the issue a miss considering where interest rates are today (near multi-year historical lows)," said Mr Lin.
"I expect that the majority of investors in this deal are likely to be institutional (fund managers,/insurance or even banks), who need high-rated long-dated paper and are happy to accept the long expected tenor on the issue," he said.