Markets

Christopher Langner is a markets columnist for Bloomberg Gadfly. He previously covered corporate finance for Bloomberg News, and has written for Reuters/IFR, Forbes, the Wall Street Journal and Mergermarket.

Regardless of whether they have any ties to Standard Chartered Plc, plenty of companies in Asia are upset at the bank today. Its decision to skip the call on one of its junior subordinated bonds has weighed on prices of corporate perpetuals around the region.

That's a problem in a place that has become increasingly reliant on this kind of security to meet lenders' leverage requirements. Issuance of such notes by non-financial corporations has already exceeded 2015's level this year and is on track to beat 2014, which was a record.

Peter Pan Syndrome
Asia's non-financial corporations have increasingly turned to bonds with no maturity date as a way to curb leverage on paper
Source: Bloomberg

Perpetuals are popular because bonds without a legal maturity date may qualify as equity according to International Financial Reporting Standards, reducing a company's leverage in the eyes of banks and making it easier for them to get lower rates on loans. Investors buy them because they're pretty certain they'll be redeemed in full at the first call. In other words, these are three- to five-year notes that pay higher yields than regular securities of a similar tenor.

StanChart has now challenged that notion.

The London-based lender said in its third-quarter earnings statement Tuesday that it wouldn't exercise the option it has in January to buy back its $750 million of 6.409 percent non-cumulative redeemable preference shares that were issued in 2006.

That makes sense, from the bank's standpoint. After January 2017, the notes convert to paying three-month Libor plus 151 basis points. At current levels, that translates into a yield of less than 2.4 percent. StanChart's 10.5-year 4.3 percent dollar bonds due 2027 are yielding 4.5 percent.

The fact a perpetual might not be called isn't something most investors consider when they purchase the notes. Now, they're having to think about what would be a fair price for a lot of the debt they hold if, when the time comes, it may be cheaper for a company not to act.

Don't Miss That Call
Record amounts of corporate perpetual bonds are set to be called in Asia in the coming five years. Many were issued when yields were higher than they are now
Source: Bloomberg

Most of the perpetuals in Asia due to be redeemed in the next couple of years were issued between 2011 and 2013, before negative rates took hold in Europe and Japan and when dollar bond yields were higher.

Money managers in Asia will be running a lot of numbers right now. As for those companies that were looking at selling perpetual debt themselves, it just got a whole lot more expensive.

Thanks, StanChart.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Christopher Langner in Singapore at clangner@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net