Perpetual Bonds Increasing in Popularity

Perpetual Bonds Becoming Ever More Popular 

Perpetual bonds are popularly being issued by the local banks. Surplus liquidity is a benign outlook for interest rates and the shortage of profitable investment avenues for institutional investors has impelled plenty of interest in such debt offerings.

A perpetual bond has no maturity date and investors keep getting coupon payments all through the instrument’s life. The issuer is under no obligation to redeem them.

Bank of India and Punjab National Bank came into the market with perpetual bonds some time back and saw taking up of half the issues on the day it opened. PNB is hoping to raise an amount of Rs 5000 million through these bonds. Bank of India will hope to get about Rs 4000 million. A coupon rate of 10.4% is offered by PNB with a call option of 10 years.

Bank of India bonds are priced to yield 10.55%, and have a call option after 10 years. There will be an increase of 50 basis points on the coupon rate if the call option is used. Both of them have a mark-up of 50 basis points. Normally bank has to shell out a premium of 50-70 basis points over the yield provided by corporate bonds with similar intention.

Banks typically launch perpetual bonds during surplus liquidity in the system to enjoy the appetite available for these instruments. Banks run by the state take the alternative of raising capital in this form as some fund raising options that are by way of equity dilution may not be in agreement with the owner, i.e. the government.

According to a senior official of FIMMDA or Fixed Income Money Market and Dealers Association, which gets the participants in the fixed income, derivatives segment and money market and together, perpetual bonds do not draw the regular regulatory requirements and with a long tenor would surely deserve coupon rates over 10%.

Regional head and director of StanChart capital markets, South Asia, Prakash Subramanian said that till some time back perpetual bonds were not attracting investors, but lately have generated plenty of interest even from the trading viewpoint. Most of these issues are subscribed by banks. These bonds can be considered as value-buying as they can sell them to provident funds or insurance companies later.

It is interesting by half the PNB and BoI bond programmes are pledge by fellow banks. They are the state-owned banks including Allahabad Bank, Corporation Bank, Bank of Maharashtra with their MNC equivalents like HSBC, Deutsche Bank, Barclays and StanChart.  Rest of the investors are mutual funds accounts and insurance companies. Treasury officials feel that now we are seeing a buyers market for perpetual bonds. With the coming off of corporate bond yields, bond traders don’t see much interest in government bonds and rates offered on bulk deposits and certificates of deposits are also heading southwards.

Currently the money market is flooded with surplus cash flows bring a fall in bond yields. Loans rates are still high even after high liquidity situation which has resulted into a wide gap between interest rates and bond yields.