Note key risks in perpetual securities, MAS cautions

The Straits Times
Magdalen Ng
17/5/2012

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.'