Note key risks in perpetual securities, MAS cautions

The Straits Times
May 17, 2012
Note key risks in perpetual securities, MAS cautions
Would-be investors should be aware of how they differ from regular bonds

By Magdalen Ng

THE Monetary Authority of Singapore (MAS) has issued a word of warning to investors caught up in the investing flavour of the month - perpetual securities.

The MAS cautions that perpetual securities are not like regular bonds, and says investors should consider the key risks of any products before investing in them.

In response to queries, an MAS spokesman said yesterday that issuers offering perpetual securities to retail investors are required to comply with the Securities and Futures Act (SFA).

This legislation 'requires proper disclosure of the feature and risks of the product either in a prospectus or an offer information statement'.

'Investors should note, among other factors, that perpetual securities, unlike plain vanilla bonds, do not have a maturity date and the issuers are not obliged to redeem the perpetual securities.'

However, the MAS did not confirm if it had met bankers over concerns on the unprecedented run of perpetual bond sales with retail investors in Singapore, as reported by Reuters, on Monday.

Perpetuals are bond-like instruments, and offer attractive interest returns. However, unlike bonds where an investor gets the interest and principal according to a fixed schedule, issuers of perpetual securities can defer coupon payouts under certain circumstances. Repaying the principal is also left to the issuer's discretion.

The MAS noted: 'If issuers do not exercise the redemption option, investors who wish to exit their investments can only do so by selling them in the secondary market. They will therefore be exposed to market price fluctuations, which could be quite severe, especially if interest rates go up. They may also be exposed to the risk that there could be a lack of willing buyers in adverse markets.'

Retail investors were able to buy into the $500 million offered by Genting Singapore through the automated teller machines of local banks, as per a regular initial public offering.

This is because perpetual securities meet the requirements of an 'Excluded Investment Product' under the SFA. Consequently, they can be sold without advisory services that can point out risks, so long as there is a prospectus available.

While the MAS 'expects issuers to make clear to investors the difference between perpetual securities and other bonds', there is no way of knowing whether the person who reads the prospectus fully comprehends the literature.

While the general public can apply through the ATMs, OCBC Bank sells certain investment products such as dual currency returns and perpetual securities only to their Premier Banking customers and other sophisticated clients.

'We have a structured process of recommending appropriate investment products to these customers. This sales and advisory process requires our sales staff to conduct a financial needs analysis with our customers, which includes understanding their financial objectives, risk profiles, and investment horizons,' said Ms Koh Ching Ching, head of group corporate communications at OCBC.

A DBS spokesman said that retail perpetual bond offerings are marketed just like retail equity and retail plain vanilla bond offerings.

'At the IPO stage, the purchase of these retail instruments is generally self-directed as DBS does not sell them over the counter at branches. Retail investors are referred to the IPO prospectus or offer information statement and can subscribe to them via ATMs.'

songyuan@sph.com.sg

Quote:'Investors should note, among other factors, that perpetual securities, unlike plain vanilla bonds, do not have a maturity date and the issuers are not obliged to redeem the perpetual securities.'

.

Perpetuals are bond-like instruments, and offer attractive interest returns. However, unlike bonds where an investor gets the interest and principal according to a fixed schedule, issuers of perpetual securities can defer coupon payouts under certain circumstances. Repaying the principal is also left to the issuer's discretion.

The MAS noted: 'If issuers do not exercise the redemption option, investors who wish to exit their investments can only do so by selling them in the secondary market. They will therefore be exposed to market price fluctuations, which could be quite severe, especially if interest rates go up. They may also be exposed to the risk that there could be a lack of willing buyers in adverse markets.'

Using simple laymen terms (for those who thinks PERPS are low risk, hi returns investments),

Unlike SGS Bonds, don't assume PERPS to have a guaranteed floor price (since no guaranteed redemption).

now why doesn't MAS come out to provide some simple example instead of motherhood statement.

it's best to take the SIP exam now or MAS is going to add another extra module + test question in time to come

Theoretically they can don't pay dividend and never redeem. This would render the perpetual securities zero value in market. That's a big risk.

as bondholders you don't have any voting rights so what can you do to prevent a shareholder rebellion to vote against paying bondholders?

MAS doing is basically just saying: "see here, I told you already, if you still do it later any problems not my pasar"

But personally I think for genting perpetuals should be quite ok. If you consider they been operating in msia on a deserted remote hill in the middle of nowhere in good and bad time for many decades, if it wanted to gone bust it would have done so long time ago.

not vested but if fluctuates wildly I may buy some later

No matter how strong a borrower's credit standing is, why on earth would or should a lender or investor agree to lend or part with his money on a debt instrument without a final maturity date !!! - and this is the primary issue, and a fundamental one ! - and, as a secondary issue, which also allows the borrower the flexibility to defer his regular interest payments obligation further down the road!! IMHO, the takers have to be rather stupid lenders or investors, even though they may think that they have gotten a higher yield on their investment funds.

More importantly, the banks and financial institutions which promote, support, create, and bring such 'bad' investment instruments to the market and investors - especially to the layman investors! - should be sanctioned and held responsible to reimburse the investors for any losses!!

(17-05-2012, 10:40 AM)sgd Wrote: as bondholders you don't have any voting rights so what can you do to prevent a shareholder rebellion to vote against paying bondholders?

MAS doing is basically just saying: "see here, I told you already, if you still do it later any problems not my pasar"

But personally I think for genting perpetuals should be quite ok. If you consider they been operating in msia on a deserted remote hill in the middle of nowhere in good and bad time for many decades, if it wanted to gone bust it would have done so long time ago.

not vested but if fluctuates wildly I may buy some later

it is not up to shareholders to decide whether to pay bondholders or not. it is that you MUST pay bondholders unless bankrupted already.

It is very different from preference shareholders.

(17-05-2012, 10:41 AM)dydx Wrote: No matter how strong a borrower's credit standing is, why on earth would or should a lender or investor agree to lend or part with his money on a debt instrument without a final maturity date !!! - and this is the primary issue, and a fundamental one ! - and, as a secondary issue, which also allows the borrower the flexibility to defer his regular interest payments obligation further down the road!! IMHO, the takers have to be rather stupid lenders or investors, even though they may think that they have gotten a higher yield on their investment funds.

Buffett's purchase of Goldman's perpetual preference shares during the Lehman crisis fits your description - No maturity date (in fact, he was hoping that it goes on forever), & since it's pref shares, Goldman can choose not to pay the coupon. Was it a mistake then?

At the end of the day, it boils down to whether you've been sufficiently compensated for the terms of the security (in Buffett's case, a 10% coupon with a added call option).

It would be a mistake to deem all perpetuals as bad.

(17-05-2012, 10:41 AM)dydx Wrote: No matter how strong a borrower's credit standing is, why on earth would or should a lender or investor agree to lend or part with his money on a debt instrument without a final maturity date !!! - and this is the primary issue, and a fundamental one ! - and, as a secondary issue, which also allows the borrower the flexibility to defer his regular interest payments obligation further down the road!! IMHO, the takers have to be rather stupid lenders or investors, even though they may think that they have gotten a higher yield on their investment funds.

More importantly, the banks and financial institutions which promote, support, create, and bring such 'bad' investment instruments to the market and investors - especially to the layman investors! - should be sanctioned and held responsible to reimburse the investors for any losses!!

The banks and institutions are always making so much money from the "innocent" investors that finally their greed is beyond measure one day, that they may turn into another "Lehman Brothers and Bear Stearns. Just watch. Never say never in this part of the World. What goes around, comes around is true.