SingPost – BT
Bankers caution against race for high-yield perps
Read fine print and study their risks, they urge investors
There is a new share fever in town, the sale of high yield perpetual shares. Even at $250,000 a pop, they’re selling like hot cakes, and some eager investors may forget there are some risks.
Attracted to the higher yields, investors may overlook the fine print such as the right to redeem the securities as early as after five years and coupon deferral, said some bankers.
‘Globally there’s a massive hunt for yields, (but) people are quite confused about the concept of perps because they’re not so widely traded,’ said Arjuna Mahendran, the head of investment strategy for Asia at HSBC Private Bank.
‘If in the meantime you need money, you’re at the mercy of the bank which quotes the spread,’ he added.
The sale of Genting Singapore perps which ends today is said to have attracted over $2 billion in orders for a benchmark issue typically believed to be a minimum of $500 million. The perps is guided to pay 5.375 per cent coupon.
Some private bankers have hiked up the cost for Genting to 0.75 per cent from the usual 0.20 per cent due to the strong demand, complained one investor.
Last Friday SingPost perps paying 4.25 per cent received overwhelming subscription, with orders hitting almost $2.5 billion or seven times more than the $350 million issuance.
‘That was an absolute blowout,’ said Clifford Lee, DBS head of fixed income.
‘Out of 10 clients, only one got it,’ said one relationship manager who had some pretty upset customers.
SingPost’s attraction was because it ticked all the right boxes such as ties to the government. SingPost is 26.01 per cent owned by Temasek Holdings (Private) Limited.
‘Deals that have done well in the market tend to have one or more of the following attributes,’ said Todd Schubert, head of credit research, Bank of Singapore. ‘Strong brand name such as SingPost and Genting, a new issuer that provides portfolio diversification, perceived ties or importance to the Singapore government and bondholder friendly structures,’ he said.
Right now there are probably many investors who do not read the fine print. Perhaps they should, especially if they think perps are bonds which they are not.
There are a number of commonalities such as a non-call 5-year structure with a coupon step-up in year 10, said Mr Schubert.
However, there are a number of subtle differences with respect to coupon change, coupon deferrals, call options etc that make each structure unique, he said.
‘At Bank of Singapore, our criteria for analysing perpetual securities is even more stringent than that of other bonds, as they rank only ahead of equity in the capital structure,’ he said.
But Anurag Mahesh, head of global investment and key client solutions, Asia Pacific, at Deutsche Bank Private Wealth Management, said investors do understand that the higher yield comes at a risk.
And for many non-Singapore investors, the perps are popular because they offer exposure to the Singapore dollar, he added.