Asian borrowers have typically had a shaky relationship with the perpetual asset class. The US and Europe are well populated by large utility and telecom companies for whom perpetual and hybrid perpetual bonds fit naturally into the capital structure. In Asia the experience has been a different one: Hutchison Whampoa’s €1.75bn non-call five blowout last year is certainly not the norm. In the Asian perp market, Chinese property companies have become just as common as global conglomerates.
This wouldn’t necessarily be a problem if issuers had either patience or prudence, and could be trusted to avoid pushing the market to breaking point. But they cannot. This time last year the perp market was already in trouble, as property companies tried to ram through deals with weak call incentives and meagre step-ups. That run of over-ambitious deals ended in bonds that sank in secondary, or were pulled before pricing.
By the time Ben Bernanke let the tapering cat out of the bag in May, supply had already come to an abrupt end. For the rest of 2013 Asian issuers sold only two perpetual bonds.
Things are different now. Tapering has started and, if you believe bankers, it’s already priced in. Investors certainly have more assurance of where interest rates are going to go, and packs of private bank buyers roam the bond market hungrily looking for things to buy.
Greentown Holdings got 2014 dollar perpetual issuance off to a strong start this week with a $500m non-call five year deal priced to yield 9%, and which offered a premium of just 125bp over than the B2 rated issuer’s senior curve. Last year borrowers were paying anything between 200bp and 400bp.
This makes Greentown a perfect advertisement for what your average Chinese property issuer can achieve in the bond market – equity treatment for IFRS accounting and a five year funding at a spread not that much higher that a senior bond.
Others are inevitably going to come, but the danger is that the step-ups start to drop, making structures more favourable to issuers and less so to investors. The market is already struggling under the weight of Chinese supply from all quarters and the last thing it needs is a non-call five perp from a double-B rated Chinese issuer with a 25bp first step-up at year 10. Agile Property, anyone?
It’s not just Chinese issuers that will suffer if they strangle the perp market, though. The Asian investor base, particularly the private banks, has a tendency to trade on the basis of asset class rather than name. When the perp market shuts for poor credits, it also makes it difficult for better ones — Chinese or not — that might well be natural candidates for perps.
Right now it looks like issuers have learned their lesson. Greentown’s bond came with a 500bp step-up at the first call date. For the high beta names at least, that's about where step-ups need to stay.