After the US Federal Reserve said in April that it would keep interest rates ultra-low until at least 2022, investors have been snapping up bonds that do not pay back for 40, 50 years or even forever, in their search for higher-yielding investments.
During the first half of this year, companies spanning Asia excluding Japan have issued US$28.6 billion worth of bonds with tenors of 30-years and beyond, tripling from a year ago. In May, Chinese social media giant Tencent issued its inaugural 40-year US$750 million bond paying 3.29 per cent coupon. Conglomerate CK Hutchison raised US$750 million 30-year bond paying 3.375 per cent coupon, also issued in May.
“Long tenor bonds of stable investment-grade corporates are attractive against the backdrop of interest rates being ‘lower for longer’,” said Leong Wai-mei, a fixed income portfolio manager at Eastspring Investments, the asset management arm of Prudential Corporate Asia.
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The surge in issuance means the region’s companies have locked in more firepower to combat successive waves of the coronavirus, investors have access to higher-yielding products even if they are riskier, and advisory firms are raking in fees for handling the deals.
The riskier end of the bond spectrum used to mostly attract private banking clients, but the investor base is broadening out to include a wider array of asset managers and insurance companies.
The risks should not be ignored. Perpetual bonds’ coupons are fixed for the bond’s life: when interest rates start to pick up an issuer is incentivised to not call back the bond as higher rates would make refinancing its debt costlier. In February last year Banco Santander shocked investors when it opted not to call its €1.5 billion (US$1.7 billion) contingent convertible perpetual bond.
Investors could also see their perpetual bond’s value get hammered as rate rises. Long tenor bonds are riskier than shorter tenor bonds as they are more sensitive to every small change in market interest rates. Bond prices move inversely to interest rates.
Still, demand for long tenor, perpetual bond looks poised to stay, bankers said.
“With the current low US dollar interest rates we expect a solid pipeline for long tenor bonds for the rest of this year,’ said Terence Chia, managing director of Asia-Pacific debt syndication at Credit Suisse.
Other factors are also stoking demand.
“As economies emerge from the Covid-19 crisis, rising inflation expectations will result in negative real yields, which is typically positive for risk assets,” according to AIA Group chief investment officer Mark Konyn, in an email to the Post.
The risk of inflation is especially relevant for insurers as they need to match their long-dated liability from having sold long-term insurance policies. This group of investors is a key investor for longer-dated bonds, said Carla Goudge, head of debt capital markets syndication for Asia-Pacific at HSBC.
For issuers, one extra benefit that a perpetual bond gives them is equity accounting treatment, which is off-limits to a straight bond, said Jimmy Choi, co-head of debt capital markets at ANZ. Because a perpetual bond is considered a hybrid instrument, they increase the equity ratios of a company instead of affecting its debt level.
“With the coronavirus pandemic, companies, especially those that need to deleverage, have issued perpetual bonds to shore up their balance sheet” he said.
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This article Investors seek out riskier bonds in Asia amid low interest rates first appeared on South China Morning Post