This is what you should know about perpetual bonds
What are Perpetual Bonds?
Perpetual bonds (securities), are fixed income securities without any maturity dates tied to it. When broken down individually, perpetual simply denotes an indefinite period of time, or does not have an end to it. Bonds are fixed income investments that are being loaned out from investors to corporations, typically raised by companies or government to fund or back projects. Perpetual bonds are ranked higher than normal equities, and classified to be junior to bonds with a defined maturity.
Breaking Perpetual + Bonds down individually
Perpetual Bonds, commonly known as “Perps” or “Consol” is where interest of the principal amount is being paid out in perpetuity. In essence, the notion of perpetual bond is quite similar to a dividend-paying share in the sense where as long as investors are in possession of the bond, they will be getting a recurring interest payout for as long as the bond is with them.
Distribution of Payouts
Most of these perpetual bonds generally make their disbursement of payouts, if based on a predetermined interest rate at fixed intervals periods. Common payout models usually occur every half a year; 6 months.
It is also worth noting that in worst case scenarios, corporations and companies would cease its operations and have their assets sold off. In our case of Perp holders, they are usually ranked below senior creditors but will still get their payout before the ordinary stockholders. This means that Perp holders may risk losing partial of their investment upon liquidation.
This is a general hierarchy of where Perpetual bonds/securities holder will be ranked. It may differ for some companies, hence it is safe to also check where do Perp holders stand in terms of repayments.
When can we consider a PERP to be Defaulted?
- If a company does not make their distribution/payouts, it is not considered as a default. The corporation that issues the Perp has the right to defer payments at a indefinite period of time.
- There will be proper documentations given to denote what embodies a default. Typically, a court order made to the issuer would trigger the default.
- Corporations that issue Perps have the option to redeem these bonds/securities back at a specific date, but they are not obligated to do so. If Perps are not being redeemed at a specific date, this would not be deemed as a default.
Perpetual Bonds : The Pros & Cons
Advantages of Perps
Perpetual bond holders will be able to receive fixed interest repayments on a fixed schedule for a indefinite amount of time till a specific date is given from the issuer to redeem the bond. However, a Perp should not be considered as a form of fixed passive income factoring the risks that entails with it. The step-up feature may include conditions such as holding onto bonds for above X number of years would trigger an increase in interest for higher payouts. Overall, Perps have a higher yield as they are considered to be an hybrid security as compared to a normal bond. If an investor has the spending power, he or she may consult a financial institution to get financial advices to purchase wholesale bonds.
Disadvantages of Perps
If the company does not make any money out of the investment raised from Perps to fund a specific project, there will be a delay in pay outs and Perp holders will risk holding onto their Perpetual securities forever! Perp holders do not have any control over when the Perp bond will be redeemed nor do they have any rights to affect or request the call dates as this decision can only be made by the issuer of the Perp bond. Investors have to be able to “overcome” their emotional side and understand that there will be a risk in delayed distribution payments or no distribution payments at all.
What to Take Note of Before Investing in Perps
- Perp Bonds/Securities are not for anyone as they are relatively complex to comprehend to those who are not financially savvy.
- Different Corporations offering different Perp Bonds have their own set of “rules”, meaning to say no one corporation has the exact same terms and conditions when it comes to – Coupon Step-up, Issuer Call, Change of Control Call, and Deferred Interest Payment.
- Accept the fact that your principal amount may not be repaid since there is no maturity dates at all in the event the issuer declares bankruptcy, no issuer call made, no distributions are being made, or if the corporation is being liquidated.
- Have the ability and be prepared to withstand market prices and interest rate fluctuations from time to time as well as the credibility of the Perp Issuer to meet the payout dates and obligations.
- Able to NOT receive distributions forever as a result of income loss
- Difficulty to let go a Perp in a secondary market
- High Financial risk to your overall investment portfolio especially if Perps take up majority of your overall investments.
Who are Offering Perpetual Bonds (Perps) in Singapore at the moment?
With reference to fundsupermart, under the bonds section, simply input “Perp” into the search box and you will get results like such. Depending on which type investor you are and what kind of investment outcome you are looking for, this is where you are able to select between retail bonds or wholesale bonds.
Retail Bonds are usually purchased by retail investors as the minimum investment is made affordable to the retailers. Whereas Wholesale bonds can also be purchased by retail investors, but typically only bought by accredited institutional investors as it could cost anything from $200,000 above. Do note that if a retail investor has the spending power and decides to purchase wholesale bonds based on the recommendation of a financial institution, he/she would automatically be covered under the (FAA) Financial Advisers Act.
It is not recommended for retail investors to make direct purchase of wholesale bonds as they will forfeit the rights to be under the protection of the FAA. The FAA will only be eligible and safeguard an investor if he/she has already gone through a financial needs analysis, along with financial advice and recommendation of financial products.
Another alternative for Perp investors to be able to purchase wholesale bonds would be if he/she falls under the scenario where there have already declared themselves as an accredited investor, at least S$2 million of net personal assets, or earned a minimum of S$300,000 in the past 12 months. Investors that belong to this category would have to carry out their own due diligence to make sure that the particular Perp bond that they are interested in fits their investment goals and their current financial state.
Interested parties should keep themselves update on the latest perpetual bond news from fundsupermart page.