August 28, 2015 / 8:41 AM / 3 years ago

Looming U.S. rate hike, unstable markets spark Asia perpetual bond boom

HONG KONG (Reuters) - Prospects of a U.S. interest rate hike and volatile stock markets have turned perpetual bonds into a popular funding tool for Asian companies, which have doubled their borrowing this way to a record $26 billion so far this year.

Perpetual bonds or “perps” are attractive to companies because they are long term, which eases refinancing pressure on borrowers. Companies can also classify perps as equity, which makes it easier and less costly to borrow further by keeping the overall debt-to-equity ratio low.

While perps still account for a relatively small amount of total funding by Asian firms, this high-risk type of debt has become particularly popular this year with Southeast Asian firms seeking to take advantage of investors seeking higher yielding products before the U.S. Federal Reserve hikes interest rates as expected later this year.

Issuers are also keen to avoid raising funds through stock markets, where investors worried about China’s economic slowdown - and more recently the plunge in mainland Chinese stocks - have sent regional and global bourses see-sawing.

“We are in volatile waters, between the debate on when rates will move up, China’s slowdown and stock market gyrations,” said Rafael Jose Consing, treasurer of Philippines-based port operator International Container Terminal Services Inc (ICT.PS), which raised $750 million in perps this year.

Thomson Reuters data shows that Asian companies raised $26 billion through perps in the first 8 months of the year, almost double the $14 billion raised in the same year-ago period.

These bonds are particularly attractive to infrastructure firms that need long-term project funding but whose cash flow is largely steady.

So far this year, utility SMC Global Power Holdings Corp, a unit of Philippine conglomerate San Miguel Corp (SMC.PS), has issued $300 million worth of perps and Singapore marine, energy and water group Sembcorp Industries (SCIL.SI) raised 600 million Singapore dollars ($428.11 million) via these bonds.

“While perpetual securities usually come with a higher coupon over a regular bond, they add diversity to our funding sources and provide long-term funding that matches our long-term asset positions,” Frank Koh, senior vice president of corporate finance for Sembcorp, said by telephone from Singapore.

In Asia, most perp investors are wealthy individuals seeking high-yielding products to make up for the decline in bonds from Chinese property firms, which have been hit by a year-long slump in the real estate market.

These investors, however, are less likely to hold onto this debt if markets turn for the worse, investors say.

“In Asia, the participation of retail investors is higher compared to other regions,” said Thomas Drissner, investment manager at Aberdeen Asset Management.

“During most of the time this actually adds stability to our market. However, those same investors all run to the exit door at the same time when volatility spikes,” he added.

Editing by Miral Fahmy

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