From here to perpetuity
A growing number of Malaysian companies using perpetual bonds to raise funds
CREATIVE accounting with innovative financing methods have no limits, and perpetual bonds are certainly growing as an avenue of choice for companies to raise funds in Malaysia.
The latest company to join the bandwagon tapping into this class of debt is oil and gas-related group Yinson Holdings Bhd.
The floating production, storage and offloading service provider had announced on Thursday that it will be setting up a perpetual securities programme of up to US$500mil (RM2.13bil) to fund future capital expenditure requirements.
Other companies that had gone aboard this bandwagon before included Mah Sing Group Bhd, Sime Darby Bhd and DRBHicom Bhd.
Malaysian Rating Corporation’s (MARC) assistant vice president for ratings, Taufiq Kamal, notes that perpetual bonds have a long history in the global financial markets, and are often issued by banks to support their capital structure.
This class of debt has grown in popularity today and its avenue for fund-raising is not just limited to financial institutions nowadays.
“Increasingly, we are seeing corporates issuing perpetual bonds in Malaysia,” Taufiq says.
This class of debt gives flexibility to companies to raise funds and at the same time keep their gearing levels under control without the necessary dilution in equity base.
Perpetual securities are usually classified as a kind of equity under the international financing reporting standard and increases shareholders’ funds of the issuer group.
It also reduces gearing ratios by taking these extra liabilities off the balance sheet and lowers perceived debt levels to allow for companies to take on new projects.
This class of securities are often listed on three exchanges in this part of the world, at the London Stock Exchange, the Hong Kong Stock Exchange and the Singapore Stock Exchange.
Analysts have not been alarmed by this development and are cautiously monitoring this emerging development among Malaysian companies.
RAM Ratings head of structured finance ratings Siew Suet Ming tells StarBizWeek that perpetual bonds are a hybrid instru- ment that has characteristics of both debt and equity where it pays a fixed coupon but has an indefinite maturity.
“However, it often includes step-up rates to incentivise borrowers to (fully) redeem the bonds,” Siew says.
Debt-like or equity-like
She notes that RAM would evaluate the nature and terms of the perpetual security to see if it is more ‘debt-like’ or ‘equity-like’ and accord the appropriate treatment in its credit assessment.
“If it is structured to behave more equity-like, perpetual instruments can be used as a means to reduce gearing,” Siew says.
Taufiq says that perpetual bonds provide benefit to both issuers and investors alike.
He notes that perpetual bonds are ranked with very much less importance (deeply subordinated) to senior debts given that these instruments provide a higher yield than seniors bonds through a series of interest payments.
“We believe this class of securities issuance adds to the diversity of funding sources available to issuers.
“Given the absence of repayment schedule as would be the case for typical bond issuance, it affords better liquidity management over the medium term,” Taufiq says.
He however notes that from an accounting perspective, these class of securities are treated fully as equity which allows companies to enlarge its “equity” but with no dilution in their equity base.
“This allows companies to manage their gearing levels.
However, it does not mean that only highly geared companies resort to issuing perpetual bonds,” he says.
While from an accounting perspective perpetual were considered as equity, Taufiq notes that the same does not necessarily hold true from a rating agency’s perspective.
“The key factors we consider are the length of time before a redemption can be made (non-call period), ability of the issuer to defer coupon payments, and interest step-up period and rates,” he says.
“For the perps that we have rated, issued by Sime Darby Plantation Sdn Bhd and DRB-Hicom Bhd, the equity credit given was 50%.
“The ratings on the perpetual securities were two notches below the rating of the senior unsecured debt obligations of the companies to reflect the deep subordination,” he adds.
He also says that given perpetual securities’ ratings are anchored to the senior debt rating, companies that intend to issue these class of securities would need to have a sound senior credit rating.
“Otherwise, interest payments would need to be higher, making the issuance of perpetual bonds a non-viable funding source,” Taufiq says.
RAM’s Siew says most corporate perpetual bonds are structured to with a call date, with the coupon payment repriced or stepped-up beyond the call date.
She notes that the step-up in coupon payments are often steep enough to incentivise borrowers to redeem at the call date, which effectively gives the corporate or investors a certain perspective on its maturity horizon.
“Typically, investors would already factor its expectations for additional duration risk in return for higher returns in the pricing for the perpetual security,” Siew says.
Meanwhile, Taufiq notes that the wide acceptance of perpetual securities indicates that both issuers and investors are aware of risks involved.
“For investors, a typical characteristic of it is that the dividend pusher and dividend stopper provides a safeguard to investors’ interest payments,” he says.
While the growing appetite for such type of securities may highlight the generally low interest rate economies are in today, it would be key to watch how would companies with high gearing cope when and if interest rates move upwards.
The low interest rate environment is a sweet spot for both borrowers or issuers of perpetual debt, who will appreciate the low interest or coupon payments while investors would appreciate a slightly higher than usual yield for higher returns.
“Investors will always look out for any opportunities for yield pick-up.
“Likewise, borrowers will be on the lookout for cheaper fund-raising alternatives – this will be true in such an interest rate environment,” Siew says.