Tuesday, April 10, 2012

What is perpetual bond?

On Monday, Genting Singapore has announced that it is offering $500 million worth of perpetual bonds to retail investors, which created quite a fuzz in Singapore investment spheres. Just last month the same company has raised something like $1.8 billion from sophisticated investors which had an overwhelming demand and made retail investors jealous. Since Genting name is seen as a sure bet in Singapore, this bond issue will probably have a large demand.

So what is perpetual bond? Why is it so popular? Perpetual bond is an investment instrument something between bond and equity. It is like a bond because it pays coupons like bonds until maturity but unlike normal bonds these do not have a defined maturity (so they may have infinite maturity). This means there is no fixed date for you to get back your money. You can sell these bonds in the secondary market but their value goes down if the interest rates goes up. The issuer can also defer coupon payments but has to pay cumulative unpaid coupons later.

Genting Singapore offers 5.125 per cent yield per year which is quite attractive in a time fixed deposit accounts basically yield near-zero yields. And since the traditional asset investments like property look very much like they are at their peak values, it offers a very attractive investment and diversification alternative to property which do not also yield that much rental income.

But where there is high yield, there is always a danger if you are not one of those big bankers who can always transfer the danger part to taxpayers.

Since perpetual bonds do not have a maturity date, you may not get back your initial investment any time soon. Although you can sell it in the secondary market, their value goes significantly down when interest rates goes up. And since current near zero level interest rates has nowhere to go but up, you can be sure that a perpetual bond bought today will have a lower value in the future. Second, if the issuer bankrupts, you are at the behind row to get your money. In fact you may not even get your money back at all.

Currently, analysts think the Genting being unable to make its regular payments are low since its Resort World Sentosa made $1.6 billion in operating profit last year. But every company can go belly up so when investing in a perpetual bonds, try not to tie  very large percentage of your savings to these instruments with higher risks.

The popularity of perpetual bonds are unprecedented. According to Reuters more perpetual bonds were sold in Singapore in the first three months of 2012 than in the previous decade and a half! This popularity, especially the interest of retail buyers, has caught the attention of The Monetary Authority of Singapore recently:

"MAS's focus, however, has sharpened since Genting Singapore offered S$500m to the public, giving the retail public the chance to invest via the automated teller machines of the city's local banks. The retail offering was only the second such offering of perpetuals, with Hyflux being the first to do so when it launched the first corporate perpetual issue in April last year.

The problem with ATM machines is that, unlike stocks or other structured investment products sold over the counter, investors have no access to advisory services that can point out risks. Retail investors are supposed to read the prospectus, but in practical terms no arranger can guarantee that they have done so."
Source : Perp rush causes alarm in Singapore

This blog article is to provide general information only and should not be treated as an invitation to buy or sell any property or as sales material.  Users of this report should consider this report as a one of the many factors in making their investment decision. Users should make reference to other sources of information and specific investment advice to obtain a more objective view of the property market. Asia Singapore shall not be responsible for losses suffered.

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