Recently, there has been quite a few perpetual bond issuance, like Singpost, Olam, Mapletree Logistics Trust etc. However, what must have caught MAS eye really is the Genting perpetual bond raising which included a second round to market to retail investors. Now that MAS has made it official that they are concerned, I guess it is probably a good thing.
According to the article, MAS officials are worried that retail investors are taking on too much risk without fully understanding the difference between a perpetual bond and a standard bond with a set maturity date. Likewise, I agree with them as many of my readers were asking me questions regarding the Genting perpetual bond and it was quite obvious that many were not knowledgeable about the product and yet went ahead to invest in them.
The article rightly points out that perpetual bonds come with high duration risk as there is no guarantee of repayment, which I highlighted as well. It is also the reason why I said that the CapitaMalls Asia bonds seem like a better deal to me than the Genting Perpetual bond even though the CapitaMalls Asia bonds had a lower a lower yield at 3.8% compared to Genting at 5.125%. I always recommend investing in bonds with a fixed maturity date so you have much lower interest risk.
Another risk cited by the article is that many of the perpetual bonds often allow for deferral of coupons and some may even have non-cumulative features. What it means is that the bond issuer may choose not to pay out interest payments to investors and does not have to pay back previous unpaid interest payments if it is non-cumulative. If they do that, they would not be able to pay dividends to common shareholders, but issuers like Genting don’t even pay dividend in the first place.
Finally, what is quite shocking to me is that apparently many of the private bankers in Singapore are buying perpetuals on the margin, some with even 100% margin. The leverage is sometimes granted by the lead manager. Maybe that’s why they are able to sell so much paper in such a short period of time. It is a dangerous potential bubble as perpetual bonds are listed at equity rather than debt on the balance sheet of the issuer and the issuer may end up with too much ‘leverage’ without leverage caps setting in.
In short, understand the risks fully before you invest. I still do not recommend prepertual bond investing for retail investors.
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