Asia Investors Get a Warning on Perpetual BondsBy
Borrowers from Asia-Pacific sold record $49.6 billion in 2017
Perpetual bond structures ‘aggressive’: Aberdeen Standard
Asia’s bond investors should look more before leaping into so-called perpetual bonds, amid record sales of the securities that have no set maturities and increasingly allow borrowers to postpone interest payments, according to Aberdeen Standard Investments.
Borrowers from the Asia-Pacific region have sold a record $49.6 billion of dollar-denominated perpetuals this year, more than double the amount sold in all of 2016, according to Bloomberg-compiled data. That includes Shenzhen International Holdings Ltd., a logistics firm which last week issued a $300 million perpetual note that also includes an option for the issuer to defer coupon payments under certain circumstances.
“We have seen an increase in perpetuals where the coupon is deferrable at the issuers’ discretion,” said Thomas Drissner, Singapore-based senior investment manager for Asia fixed income at Aberdeen Standard. “The circumstances under which an issuer can stop paying coupons are often very loosely defined.”
China has been a driver of the boom in perpetuals. As Beijing zeros in on leverage and the threat it poses to the financial system, more firms have turned to the securities that can be listed as equity rather than debt on balance sheets given that in theory they could never mature. Asia-Pacific lenders have also been encouraged by regulators to issue more bank capital including additional tier 1 securities and preference shares that are perpetual in nature.
As investors starved for yield go along with the trend of perpetual structures favorable to issuers, many borrowers get away with relatively low coupons, according to Drissner. Some perpetuals have so-called dividend stoppers, which prevent the issuers from paying stock dividends if they have missed a bond coupon. But that isn’t always helpful as some borrowers have no history of paying dividends in the first place, he added.
The fund’s concerns echo a broader trend of investors receiving less compensation for risks, as the overall dollar bond market in Asia swells. The average yield premium on regional notes in the U.S. currency has fallen to record lows this year, according to a Bloomberg Barclays index going back to 2009.
“There is still strong demand for income, which in extremes can lead to risk not being adequately priced,” said Drissner.
A surge in first-time issuers has also increased complexity in Asia.
“Every time a first-time issuer sells a bond, we have to start from scratch, getting used to new business models, management teams,” he said. “It’s a challenging environment.”