Note key risks in perpetual securities, MAS cautions

[mysterion]

If cost of equity for an issuer (e.g. GIL) - as demanded by the stock market including by smart/informed sophisticated investors - is say about or more like at least 12%p.a., then by rational thinking, shouldn't the cost or yield of a perpetual senior debt be close to 10%p.a.? Are investors getting that?

Perhaps the intelligent investor should look into the area of "perpetual securities" as special situations when fixed-income instruments go out of favor. Some examples would be when interest rates rise substantially or when the issuer goes into temporary financial difficulties (and hence, deferring coupon payouts). As a result, the price of such perpetual securities would drop significantly in the secondary market, causing its interest yield to increase substantially (plus with a much greater potential for capital appreciation).

Wouldn't this create a margin of safety and make such investments much more attractive? Of course, this depends on the specific situation and would require the investor to put in effort to research the business fundamentals.

Since you propose, or think so, now can you tell me is there really such a possibility such counter existed in SGX? And if you don't mind, tell us why you think so. We all may buy your idea.

Actually I'm suggesting that we keep an eye on such financial instruments in the future when they fall out of favour and become undervalued, and not just declare them bad investments as a whole.

[Temperament]

If cost of equity for an issuer (e.g. GIL) - as demanded by the stock market including by smart/informed sophisticated investors - is say about or more like at least 12%p.a., then by rational thinking, shouldn't the cost or yield of a perpetual senior debt be close to 10%p.a.? Are investors getting that?

Perhaps the intelligent investor should look into the area of "perpetual securities" as special situations when fixed-income instruments go out of favor. Some examples would be when interest rates rise substantially or when the issuer goes into temporary financial difficulties (and hence, deferring coupon payouts). As a result, the price of such perpetual securities would drop significantly in the secondary market, causing its interest yield to increase substantially (plus with a much greater potential for capital appreciation).

Wouldn't this create a margin of safety and make such investments much more attractive? Of course, this depends on the specific situation and would require the investor to put in effort to research the business fundamentals.

Since you propose, or think so, now can you tell me is there really such a possibility such counter existed in SGX? And if you don't mind, tell us why you think so. We all may buy your idea.

Actually I'm suggesting that we keep an eye on such financial instruments in the future when they fall out of favour and become undervalued, and not just declare them bad investments as a whole.

Oh that's what you mean. i think actually what you mean is exactly what most of us are afraid of. When it happens, it is not easy for these products to be "attractive" again. And most probably for a long time. In the long run i think these kind of products are very "dangerous". For current very low Bank's interest rate it is quite attractive. That's why all the "Buayas" are very active now. Of course some instituions are even buying it now. i understand some are even using margins. i suppose they know when to get out before retailers when the market turns(interest rate goes up, etc...) Don't forget every instrument in the markets will profit someone some of the time, if not the instrument cannot exist for long. So it is a "good" product for some until the retailers realise no good for them in the long run. IMHO.