Perpetual securities are debts, not equity. Here's why

Perpetual securities are debts, not equity. Here's why
https://www.theedgesingapore.com/portfol...-heres-why

Some time back, d.o.g. had written a more succinct explanation of understanding perpetual securities.

My opinions differ slightly from the author; I do not think it is incorrect to classify perpetual securities as equity.

Perpetuals possess numerous features of debt, but they are not debt, because holders of perpetuals cannot take legal action against the issuer if no dividends are paid, or if the securities are not recalled. In other words, perpetual holders cannot foreclose on issuer's asset when a 'default' event is triggered, which the debt holder can.

So why would anyone want to be a perpetual lender? Mainly because of the higher returns (and protection features, like step-up dividends if not redeemed after first call) offered by the issuer, vis-a-vis regular debt like bank loans or bonds.

Where perpetuals fail to qualify as debt -- inability to foreclose on assets in a 'default' -- is what allows them to be treated as equity.

In this manner, perpetual holders and ordinary minority equity holders are similar in their inability to exercise any legal action to extract assets from a company. You buy perpetuals and/or equities and hope the company is able to earn enough to pay you a dividend. If they don't, there's nothing you can do.

Since perpetuals rank above ordinary equity in receiving dividends, and since a company will usually be already taking on other forms of debt before they use perpetuals to finance operations, the equity holder will be the lowest ranked amongst numerous stakeholders when it comes to receiving economic benefits from said company. Suppliers will be paid, bank interest will be paid, bond coupons will be paid, corporate taxes will be paid, dividends to perpetuals will be paid, and finally...if there is anything left to be paid, dividends to ordinary equity.

So when an equity investor is prospecting a company which has issued perpetuals, he will have to look very hard at where his return is going to come from.

The problem is where things get blurred is when hyfluxshop gt spins off but PS holder do not get a share of it. Doesn't sound like a share of the company ...

..

Perhaps the terms of the PnP were written such that PnP only ranked senior to ordinary equity in the distribution of cash dividends.

Perhaps it was not in the terms that PnP must be satisfied by their cash dividends first, before ordinary shareholders may receive any kind of dividends, including shares.

In any case, PnP holders probably did not raise any concern about this when it happened because the value of hyfluxshop was so small, and therefore, deemed immaterial to them. Due to the turn of events, this dividend in specie now looks like OL's lifeboat.

Lesson: Always look at what was (not) written in any contract/prospectus.

But I guess if certain people intends to screw you over, they will find some way to do so regardless. Therefore the emphasis on management integrity.

It is probably futile to try to classify PnP into a specific category. Accounting is an art, and depends on where are the incentives..

From a Mgt's POV, of course they would like to treat it as equity because they can hide its cost from plain view. From investor's standpoint, we would need to treat it as a debt. So it really depends on where one stand. For auditors, they are paid by Mgt and so i reckon they treat it as equity!

Hyflux issued Perpetual Preference Share in 2011 and Perpetual Securities in 2016.
Will they be treated differently in terms of claim?

On page 60 of the 2017 Annual Report, I see the Perp Securities issued in 2016 but could find the Perp Preference Share issued in 2011. Can any accountant enlighten me if the 2011 Perp was lumped into share capital?

(31-03-2019, 08:14 PM)Shiyi Wrote: Hyflux issued Perpetual Preference Share in 2011 and Perpetual Securities in 2016.
Will they be treated differently in terms of claim?

On page 60 of the 2017 Annual Report, I see the Perp Securities issued in 2016 but could find the Perp Preference Share issued in 2011. Can any accountant enlighten me if the 2011 Perp was lumped into share capital?

You can see that from page 109, note 17 of share Capital, the 4,000 perp preference shares is included in share capital account.