Bond traders often complain that investors in Asia tend to buy securities, tuck them away and forget about them until maturity. Perhaps that explains why holders of perpetual bank bonds issued almost 10 years ago aren't accounting for the possibility that they won't be called next year in a replay of Standard Chartered Plc's decision earlier this week.
Hong Kong's Dah Sing Bank Ltd., Singapore's Oversea-Chinese Banking Corp. and the State Bank of India all have perpetual dollar-denominated notes that would normally be expected to be redeemed next year. Even though these notes offer no incentive for the banks to cancel, they are still trading near par, implying the call will be met. Meanwhile, similar bonds in Europe have dropped steeply as investors consider the possibility they'll be holding them much longer than expected.
Standard Chartered chose not to call its 6.409 percent perpetual notes issued almost a decade ago because after January they convert to paying three-month Libor plus 151 basis points. That translates into a yield of less than 2.4 percent. New perpetuals issued by the bank in August have a yield of 7.6 percent.
Similarly, the $400 million of 6 percent junior perpetual notes of OCBC's subsidiary Wing Hang will pay three-month Libor plus 185 basis points after their first call in April. That's a mere 2.73 percent. DBS Group Holdings Ltd. sold $750 million of dollar perpetual notes in August that now yield 3.7 percent and are perhaps a good gauge of what it would cost OCBC to replace the bonds coming up for redemption. It makes sense to leave them outstanding.
Dah Sing's debt offer similar economics, but State Bank of India's 6.439 percent notes sold in 2007 are perhaps the perfect example of a bond that begs not to be canceled. After the first call in May, the bond pays six-month Libor plus 220 basis points, which translates into 3.46 percent, or almost half the current coupon. More important, this would be far less than the 5.6 percent yield available in the bank's most recent perpetual, sold in September.
All of these new floating yields seemed onerous enough to force a call when the bonds were sold and Libor was around 5 percent. Now, with the benchmark below 1 percent and no sign that it will rise much, the economics of redeeming the debt early are in question.
Asian investors, however, seem oblivious to that even after Standard Chartered proved it can happen. It could be that they are simply presuming that none of these banks would want to spur the kind of uncertainty that the U.K.-listed institution did by not calling its securities. That may well be the case, especially in this region, where perception matters even more.
Still, these banks have no financial reason to redeem their securities next year. And investors should be waking up to that possibility.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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Christopher Langner in Singapore at firstname.lastname@example.org
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