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Perpetual Bond Sales Rise Perpetual Bond Sales Rise(0)

Sale of Perpetual Bonds in Singapore

There has been a quantum jump in the sale of Perpetual Bonds in Singapore this Year. The sale this year alone surpassed the combined sales of last 15 years.  The upper limit of the market for Singapore dollar Perpetual Bonds is still being tested with Neptune Orient Lines perpetual about to be released and bonds of Wilmar International and Ascendas in the offing.

The advantage of Perpetual Bonds is that they are treated like equities under rules and the companies can raise funds without any maturity date.  Though at present these bonds are being lapped up by investors, it is felt that this enthusiasm may wane in the near future. Experts feel that the market is getting saturated.

This is partly because, the perpetual launched by casino resort Genting Singapore become extremely successful and absorbed $1.8 billion from the market. The perpetual has already secured orders of about $6m, bankers have been discussing a repeat launching to soak this amount. This has resulted in pressure on the value of Genting perpetual, which is currently being marked at 99.50.  Experts feel that the market may not be ready for another perpetual soon.

The success of Genting affected the sale of perpetual released one week later by Mapletree Logistic Trust which could get only $350 million out of anticipated S$500 million, though it paid slightly more return.

Driven by the investor sentiment, a total amount of S$ 3.062 billion was raised by five corporate perpetual since January, which itself is more than last 15 years.  With another three deals coming, the subsequent perpetuals may not perform well unless the yield offered is higher.

Meanwhile, NOL dealing with Container Shipping, which is planning to launch a perpetual soon, may have to try hard to market it. The company reported a loss of US $ 320m in the fourth quarter last year. According to IFR, the Standard Chartered, OCBC, HSBC and DBS would be the joint leads of this offer.

Another company which is planning for launching a perpetual bond is the Agri group Wilmar.  This company, which deals with edible oils, has oil palm plantations in South-East asia and its operations are spread all over Asia.

What is a Perpetual Bond What is a Perpetual Bond(0)

Definition of  Perpetual Bonds 

Perpetual bonds are bonds that don’t have a date of maturity. They cannot be redeemed but payout a stable interest till the instrument lasts. Some of the few prominent perpetual bonds are those issued by the British Treasury to compensate smaller amounts used to finance the 1814 Napoleonic Wars. People in the U.S. deem that the government can issue perpetual bonds to become more efficient, as it aids in evading refinancing costs connected to the issue of bonds with a definite maturity date.

Perpetual bonds are often called ‘consol’

Perpetual bonds are bonds with no maturity date and to compensate for that they pay higher rate compare to other bonds with identical credit profile. In fact they are not really popular it is tough to find many perpetual bond issues. You will find more dollar denomination perpetual bond issues as compared to rupee ones.

Typically the company issuing perpetual bonds decide on what to call them which suggests that they can either redeem the bond at a given time period like 5 or 10 years. Perpetual bond issues from Tata Steel came with an option that if they were not called within a particular time period then the issuer would pay an increased rate of interest on them. The bond was issued at 11.8%, and if it is not called by the company in 10 years then the coupon rate would augment by 300 basis points.

They have to be listed on the stock exchange, but some of them do not see any trading at all. It can be of some interest to institutional investors and pension funds but holds no value for retail investors.

There is hardly any situation where an investor will be wealthier with a few percentage points increase in interest income each year with the transaction that will never bring back their capital. It is not a good investment option.

Perpetual bonds can be good for companies and banks to raise cash and buttress their capital. Pension funds can also gain by locking on to high interest rates, and by redeeming their principal redeemed they anyway have to re-invest the amount in some other instrument. Perpetual bonds are in any way suitable for retail investors.

Perpetual Bonds Increasing in Popularity Perpetual Bonds Increasing in Popularity(0)

Perpetual Bonds Becoming Ever More Popular 

Perpetual bonds are popularly being issued by the local banks. Surplus liquidity is a benign outlook for interest rates and the shortage of profitable investment avenues for institutional investors has impelled plenty of interest in such debt offerings.

A perpetual bond has no maturity date and investors keep getting coupon payments all through the instrument’s life. The issuer is under no obligation to redeem them.

Bank of India and Punjab National Bank came into the market with perpetual bonds some time back and saw taking up of half the issues on the day it opened. PNB is hoping to raise an amount of Rs 5000 million through these bonds. Bank of India will hope to get about Rs 4000 million. A coupon rate of 10.4% is offered by PNB with a call option of 10 years.

Bank of India bonds are priced to yield 10.55%, and have a call option after 10 years. There will be an increase of 50 basis points on the coupon rate if the call option is used. Both of them have a mark-up of 50 basis points. Normally bank has to shell out a premium of 50-70 basis points over the yield provided by corporate bonds with similar intention.

Banks typically launch perpetual bonds during surplus liquidity in the system to enjoy the appetite available for these instruments. Banks run by the state take the alternative of raising capital in this form as some fund raising options that are by way of equity dilution may not be in agreement with the owner, i.e. the government.

According to a senior official of FIMMDA or Fixed Income Money Market and Dealers Association, which gets the participants in the fixed income, derivatives segment and money market and together, perpetual bonds do not draw the regular regulatory requirements and with a long tenor would surely deserve coupon rates over 10%.

Regional head and director of StanChart capital markets, South Asia, Prakash Subramanian said that till some time back perpetual bonds were not attracting investors, but lately have generated plenty of interest even from the trading viewpoint. Most of these issues are subscribed by banks. These bonds can be considered as value-buying as they can sell them to provident funds or insurance companies later.

It is interesting by half the PNB and BoI bond programmes are pledge by fellow banks. They are the state-owned banks including Allahabad Bank, Corporation Bank, Bank of Maharashtra with their MNC equivalents like HSBC, Deutsche Bank, Barclays and StanChart.  Rest of the investors are mutual funds accounts and insurance companies. Treasury officials feel that now we are seeing a buyers’ market for perpetual bonds. With the coming off of corporate bond yields, bond traders don’t see much interest in government bonds and rates offered on bulk deposits and certificates of deposits are also heading southwards.

Currently the money market is flooded with surplus cash flows bring a fall in bond yields. Loans rates are still high even after high liquidity situation which has resulted into a wide gap between interest rates and bond yields.

Price of Bonds Yearly Review Price of Bonds Yearly Review(0)

Global Bonds Price Overview of 2011

Even though most investors are aware of the advantages of possessing exchange-traded funds, individual stocks and global equity funds, global bonds have remained reasonably ambiguous. Russell Investments Canada research offers very good reasons to look at this inequity in the portfolio.

To begin with there is a shortage of diversification in the bond market in Canada, which is similar to the stock market. S&P/TSX composite index is dominated by resource stocks and government bonds are a part of the DEX Universe Bond Index, yardstick for bonds in Canada.

In fact more than 73 % of bond issued in Canada are by the government, which includes federal government, municipalities, provinces and government agencies according to Bilal Naqvi senior research analyst, Russell. Perhaps, this has made bond market in Canada very conservative.

Typically government bonds, being ultimate in security, pay lower rates of interest as compared to corporate bonds. This results in a lower yielding bond market for investors than anywhere else in the world. As an example consider United States, report from Mr. Naqvi says that government bonds make up for 41 % of the bond market there. In the bond market globally, debts issued by the government account for 60 %.

It is not just that the corporate bond market in Canada is small, but it is also offers 52% weight to the financial sector. It is best not to overrate the safety of high weighting financial companies. It can be seen from the Russell report how a few bond fund managers in Canada suffered in their returns due to the downgrade of Manulife Financial bonds during the financial crisis.

Stock market of Canada accounts for almost 5% of all global equities. The heavy weighting resource stocks have assisted in propelling the stock market in Canada in the last few years. Strong financial foundation of the country has pulled cash into the bond market.

It was noticed by Mr. Naqvi that Canadian company bonds trade at higher rates as compared to similar global companies with the identical credit ratings. Yields and prices move in opposite direction, so is not really good news for investors who require income generating bonds.

Canadian Bond Market Prices

This year the Canadian stock market has underperformed compared to other global markets due to weakness in resource stocks. Russell Canada’s fixed-income portfolio manager Greg Nott feels that the bond market could be in line to fall behind. He is expecting that the Bank of Canada will get more aggressive as compared to central banks like the U.S. Federal Reserve Board, in increasing the rate of interest in the coming months.

Bond market of Canada is very safe and that is why it has done well, but is it more secure compared to world’s other bond markets. The report from Mr. Naqvi states that the market in Canada is not really at an advantage for its credit quality.

A broad view on the same- Canada benchmark for the DEX Universe Bond Index has a real triple-A credit rating and is 52% weighted to bonds on the other hand an equivalent U.S. index is 78% with triple-A bonds. Meanwhile, the bond market globally weighting to triple-A bonds is same as Canada.

When considering default risk, the report suggests that Canada is at the same level as other parts of the world including the United States. No doubt some European countries working at managing their debt loads have to be excused.

Mr. Nott segregates institutional bond fund managers in two sections one who develop portfolios comparable to the DEX universe index and others who venture beyond Canada-only benchmark. Typically in the other group 0 to 40 % of bond portfolio is invested out of Canada. High-yield and emerging-markets bonds can be a part of that mix.

United States Bond Market

Mr. Nott gives a couple of advice for investors looking for global bonds in their portfolio, one to have a fund approach than to purchase individual bonds. According to him it can get tough for advisor or an investor access few of the market segments globally and it is recommended to have a fund solution. This will aid you get access as well as diversification.

Another advice from Nott is to select funds that employ currency hedging; it can be a slightly controversial position. After a rally for many years, some feel that there can be a continuing downside to the Canadian dollar than upside. This is useful for an un-hedged technique and a falling dollar can add to increase in assets in foreign currencies.

According to Mr. Nott global exposure can perhaps add a percentage point to the bond portfolio profits. On the other hand volatility due to foreign currency exposure can result in the going up or down of the fund value easily by 3 to 5 or even 10 % points.

It is good to note that global bond funds have been the strongest performers even during 2008 among all fund categories. This was because investors around the world created the security of the government bonds as well as due to fall in the Canadian dollar. The average profit on global bond fund in 2008 was 19.1% while an average Canadian bond fund earned 2.8 per cent.

Canadians are recognised for investing at home and this preference is especially seen in bonds as compared to stocks. Canada’s Investment Funds Institute Data suggests that global bond funds signify around 18 % of total bond funds assets while international and global equity funds account for just a little above 1/3rd of equity fund assets.

It has been noticed by Mr. Nott that the institutional investors are lately increasing their global bonds holdings.

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