Perpetual bonds were long a sideshow to Asia’s corporate bond market, offering companies occasional — and sometimes expensive — sources of capital that helped ease concerns among lenders or credit ratings analysts. But since the start of 2017, perpetual bond issuance has taken centre stage.
Corporations in Asia ex-Japan had raised an eye-popping $7.36 billion this year as of Monday morning according to Dealogic data, already closing in on the $7.82 billion they issued throughout 2016. That's despite the fact 2016 represented a record year for corporate perpetual issuance in the region.
It may be only days before corporate perpetuals set a new volume record in Asia ex-Japan. Nan Fung Group, a Hong Kong-based property company, was building the books for a senior perpetual non-call three year bond on Monday. China National Chemical Corp hit the road the same day to gauge investor interest for its own dollar perpetual, another senior deal.
From an investor point of view, the perpetual binge is welcome. The supply gives investor a nice yield boost at a time when on US rates remain disappointingly low, despite widespread expectations that the only way for the Federal Reserve is up.
For issuers, the argument is even more compelling. By selling bonds with razor-thin coupons so early in the Federal Reserve’s rate hike cycle, Asian corporations are locking in — forever — a source of funding that is only going to look cheaper and cheaper as time goes on.
Perpetual bonds, although initially defined by subordinated structures, now frequently offer senior funding opportunities to Asian issuers. Cheung Kong Property and Sun Hung Kai Properties both tapped investors last week with fixed-for-life senior perpetuals. Yanzhou Coal, a B2/BB-/B rated issuer, showed there is room for borrowers down the credit curve last month when it raised $500 million from its own senior bond.
The downside to these bonds is that they are highly sensitive to interest rate movements. A long run of news events that increases the likelihood of faster US rate hikes should, in theory, lead to secondary prices for perpetual bonds plummeting, hurting the prospects for future issuance.
For now, though, the corporate perpetual rush appears to work for both investors and issuers. There is no doubt the volume record will be smashed this year. The only question is by how much.