Perpetual bond sales from Asia's corporate sector surged to an annual record last week, as investors' hunger for yield showed no sign of easing. With more than half the year still to go, US dollar offerings from non-financial issuers this year have reached $8.76 billion, ahead of 2013's annual record of $7.95 billion, according to Thomson Reuters data for Asia Pacific, including Australia but excluding Japan.
Power Construction Corporation of China, which printed a $500 million perpetual non-call five note, and Sinochem-backed Far East Horizon, which sold $300 million of perpetual non-call five notes, joined the fray last week, becoming the latest corporate issuers to take advantage of strong market conditions.
Financial issuers have also been active, with insurance provider FWD selling $500 million of zero-coupon perpetual non-call five bonds and asset manager and boutique investment bank AMTD Group printing $200 million of perpetual non-call three notes on Thursday. The rush of deals shows investors are willing to take on duration risk in return for higher returns.
"Some issuers' senior debt may be too tight for a lot of people, so they can either go down the credit spectrum or go down the capital structure to get more yield," said Jake Gearhart, head of debt syndicate and origination for Asia Pacific at Deutsche Bank. Perpetual bonds may be treated as equity for accounting purposes, helping companies to keep their gearing low. "A lot of Asian issuers are more reliant on bank debt than capital markets, so that flexibility is valuable to them," said Gearhart.
Some market participants complained that perps, especially those with a yield that is fixed for life, are sold mainly to private wealth investors, who may buy them on leverage to amplify returns. However, institutional investors have been supporting the recent flow of deals, too. Neeraj Seth, head of Asian credit at BlackRock, said he was "selectively positive" on perpetuals, but warned that investors needed to examine both the credit and the structure of undated bonds.
"A lot of times these bonds get sold by the name of the issuer and the headline yield of the bond," said Seth. After initial enthusiasm for perps earlier this year, there was a slight sell-off last month, as investors complained of over-supply. Nan Fung Group's perp non-call three bonds traded down half a point on May 23, their first day of trading, while even hugely oversubscribed deals like Cheung Kong Property's perp dipped below reoffer. The slump was thought to be due in part to the weight of issuance hitting the market this year.
Perpetual bonds are sensitive to rising interest rates, and their rising popularity suggests investors are unconcerned about further US rate increases later this year. Unusually, the flood of perpetual offerings has coincided with a spike in the number of Asian offshore floating-rate bond issues - two conflicting trends. "Perps are booming, but floaters are booming too," said Deutsche's Gearhart. "That shows there is a divided view of how the market is going. Step-up perp buyers and FRN buyers are in the same camp, but fixed-for-life buyers are more focused on rates not going up too much."
Despite the huge supply of perps, appetite has been so strong that the premium they offer over dated senior bonds has narrowed. "I would say the spreads between corporate perpetual and senior bonds are slightly shrinking, but it depends on the structure," said Annisa Lee, head of Asia ex-Japan flow credit analysis at Nomura. "The multiple could be 1.2x or 1.3x for senior perp with high step-up - one cannot compare a fixed-for-life perp by Company A to a senior perp with a high step-up issued by Company B. But the multiple (versus senior bonds) for fixed-for-life is lower compared to previous deals."
Fixed-for-life structures, which lack the usual step-up if not called, and therefore give issuers less incentive to redeem, have also grown in popularity this year, with seven such deals, totalling $4.0 billion, all from issuers in Greater China.
Investors have tended to assume that Asian issuers will call their perps at the first opportunity. However, issuers are not punished with higher coupon payments if they do not redeem fixed-for-life notes at the call date, and some structures allow them to defer coupon payments indefinitely. While such structures have continued to find healthy demand this year as investors hunt for yield, not everyone is a fan. "Senior step-up perps are okay," said a fund manager. "Fixed-for-life perps are f***ed up."
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