The capital market in Thailand has launched multiple issuances of perpetual bonds.
With a long-term nature and relatively lucrative returns compared to plain vanilla bonds, perpetual bonds — which are also referred to as “perps” — are increasingly popular among corporate issuers. As a result, it benefits the companies in terms of capital structure management in long-term investment plans.
General corporate bonds normally have fixed interest payments and a redemption date on which their principal will be repaid. In contrast, perpetual bonds do not determine a fixed coupon payment date or or even a maturity date. However, the common features of perpetual bonds in Thailand are the call option at the fifth year after the date of issue. Thus, the issuer has the right to redeem the bonds after they have reached the fifth year of their time horizon.
According to the conditions specified by the issuer, the investor would receive the principal in case of the issuer’s dissolution or when the issuer exercises the right to early redeem the debentures. Practically all issuers have called the bonds at the fifth year.
Perpetual bonds are interesting among investors due to the steady and predictable passive income from the scheduled coupon payments. Although issuers have to pay interest on perpetual bonds, like debt, the bonds are treated as equity subjected to accounting principles.
For the issuers, a perpetual bond has a high degree of flexibility. For example, they could decide to postpone the interest payment in the case that the company makes no profit. This makes this type of of debt instrument similar to equity instruments, said Sirinart Amorntham, senior vice-president of the Thai Bond Market Association (ThaiBMA).
The advantages for companies that raise funds by issuing perps is that in the first five years of issuance, half of the fund raising from the bond will be recorded as debt and the balance as equity. As a result, the issuers will have a small increase in their debt-to-equity ratio. But it will record 100% debt after five years of issuance, said Ms Sirinart.
Most perpetual bonds have offered high returns, making them suitable for high-net-worth individuals who seek products with relatively high returns. However, a significant risk of investment in perpetual bonds is related to the business risks of the issuers, she said.
There are currently 16 series of outstanding perpetual bonds registered with ThaiBMA with a total value of 99.08 billion baht, representing 2% of total corporate bonds, said Ms Sirinart.
The bond fits investors who want to diversify their investments and look for long-term investment options. At the same time, investors are subject to credit risk exposure and the rather complicated terms and conditions of the bonds.
At the same time, there is no cross-default condition for perpetual bonds, whereas plain vanilla debentures always have such conditions.
Source: Bangkok Post