The Straits TimesGoh Eng Yeow
23/4/2012
RETAIL investors finally got a chance recently to jump into the latest investing fad here, perpetual securities - and they seized it with both hands.
But as local interest grows in this seldom-seen type of security, similar to preference shares, investors should consider some of their potential pitfalls, as well as the attractive returns.
Casino giant Genting Singapore directed its issue squarely at small-time investors who were attracted by the hefty 5.125 per cent interest payment, known as a coupon rate, offered by the shares.
Genting was tapping into pent-up demand as retail investors had been left out in the cold in recent perpetual securities issues, directed only at the big boys.
The outcome: Genting raised $500 million from 21,594 retail investors.
This was on top of the $1.8 billion it netted from an earlier perpetual securities issue last month.
Perpetual securities are nothing new. They are bond-like instruments which offer their holders a fixed payout, but no voting rights.
But unlike bonds, in which both the principal and interest must be paid to investors according to a fixed schedule, perpetuals allow an issuer to defer coupon payout under certain circumstances. The repayment of the principal is also left at the issuer's discretion.
For issuers, one big attraction of perpetuals is that they can be structured to count as equity, rather than debt, on their books.
The other big plus is that an issuer can raise capital without diluting its equity base. Given the uncertain market conditions, this relieves the pressure on its share price that would otherwise have been triggered by a cash call such as a rights issue or a private share placement.
Until last year, only the bluest of the blue chips such as DBS Group Holdings, United Overseas Bank and OCBC Bank have been successful in attracting investors to buy perpetual securities which they labelled as preference shares.
Things however changed last year when water specialist Hyflux netted $400 million - double the sum it was hoping to raise initially - from a perpetual securities issue.
The enthusiasm didn't end there. Investors were struck by the brisk buying interest in the Hyflux perpetuals after they were listed.
Even though the mother share has suffered a 25 per cent drop since August last year, amid market turmoil, the perpetuals are trading at a 6.2 per cent premium to its $100 issue price.
It is not surprising that with the Hyflux experience in mind, investors have been loading up on the Genting perpetuals. Since its debut last Thursday, the security has attracted a total volume of 18.6 million shares in two days of trading, closing with a 1.9 per cent premium to the $1 issue price at $1.019 on Friday.
This prompted Mr Clifford Lee, the head of fixed income at DBS Bank, which has managed the lion's share of the perpetuals launched this year, to suggest that other issuers might well follow in Genting's footsteps in tapping on the broader retail investor base.
'We will hopefully see more retail bond offerings in the near future. With the strong first-day performance of the Genting perp in the retail market, this will certainly spur more interest from potential issuers and hasten more discussions for similar offerings,' he told The Straits Times.
Still, despite the exuberance, a word of caution is needed, as such instruments appear to have lured many risk-averse investors who have not touched the stock market in years.
Some sceptics believe that there must be a catch somewhere. To them, the fact that an issuer is prepared to offer such an attractive coupon payout is simply too good to be true.
As one blogger observed: 'In exchange for you lending him the money, he is willing to pay you interest of 5.125 per cent, which is considerably more than what the bank is paying you. One must wonder why he is offering an interest rate which is much higher than what other people are offering you.'
But some have noted that the higher 'interest rate' is to compensate buyers for leaving repayment of the principal at the issuer's discretion.
Outside of Asia, interest in perpetuals is almost non-existent. Europe has seen no deals this year, while North America has seen just four deals worth US$986 million (S$1.24 billion), according to Dealogic.
Interest in such instruments in these two markets abated considerably when the perpetuals issued by well-known companies such as US mortgage giants Freddie Mac and Fannie Mae were written off completely during the 2008 global financial crisis, after they went bust and failed to make their usual coupon payout.
That should serve as a cautionary tale. Retail investors should do a few checks before placing money in perpetuals.
First and foremost, it is important to evaluate the business model of the issuer and stress-test its cash flow to make sure that it has the ability to make the coupon payout. There is no point in getting lured into a perpetual which offers a big coupon rate only to find out that the company is unable to make the payment.
Since the issuer of the perpetual is under no compulsion to redeem the principal by a certain date, the only way an investor is able to get his capital back is by selling the perpetual in the market. So it is vital to consider the liquidity of the perpetuals before buying them.
So far, retail investors have not experienced any problem selling perpetuals traded on the Singapore Exchange, but well-heeled investors who bought into institutional offerings have complained of a big difference between the buying and selling price quoted to them.
One encouraging sign, however, is that most of the perpetuals issued so far this year by companies such as Global Logistic Properties, Singapore Post and Olam International are trading well above their respective issue prices.
The fact that an issuer of perpetuals can forgo a dividend payout without triggering default also places a big emphasis on the features to protect investors if such an event occurs.
Most of the perpetuals this year comes with a 'dividend stopper'. This means that the issuer will not be able to pay any dividend to its shareholders unless it makes good on all the deferred coupon payments.
That makes it important for an investor to check a perpetual issuer's dividend payout record.
Singapore Post was able to issue a 4.25 per cent coupon because the company enjoyed a steady dividend track record since it was listed almost 10 years ago. In contrast, Genting offered a higher 5.125 per cent payout, as it only started paying out dividends since last year.
engyeow@sph.com.sg
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