US Treasury rates have hit record lows several times in the last 12 months. They may well do so again in the next 12. As a result, investors with their deep reservoirs of liquidity have been pushed out along the credit and maturity curves in search of yield, which Asian issuers are taking full advantage of.
Malaysia’s Sime Darby and the Philippines’ International Container Terminal Services International are among the borrowers to have broken records for low coupons in 10 year maturities already this year. Strong names offering a decent return are almost assured a strong reception, and debt bankers are urging borrowers to push for 30 year deals.
Some issuers have pushed the envelope further and launched true perpetuals with no step-up and a coupon fixed for life. Earlier this month Cheung Kong Holdings became the first Asian issuer in dollars to sell a senior perpetual with this structure. India’s Reliance Industries launched the second this week.
But investors are clearly concerned about the risk of rising Treasury rates inherent in these issues. Despite debate about short term rate movements, all but the most pessimistic analysts expect the US economy to rebound at some point. When this happens, yields will inevitably rise. These bonds will then look less attractive to investors, even more attractive to issuers, and with no incentive to call, bondholders will be stuck.
Never mind the quality
The strength of the credit is irrelevant to these concerns. Cheung Kong Group is a multinational conglomerate, not a typical Chinese property borrower. But after pricing at par, its bonds sold off strongly in the secondary market and are trading at 96.5. KWG Properties, which offered a step-up at 10.5 and 20.5 years for its recent perpetual, was forced to pull the deal during execution and return with a much simpler seven year non-call three structure.
India’s Reliance is one of the world’s largest oil refining companies, and rated one notch higher than the Indian sovereign with a positive outlook. US accounts looking for dollar issuance from Indian corporations have few more attractive options. But its latest attempt to sell a perpetual deal could have hit a roadblock. A day after Reliance opened books the deal was struggling, said investors.
Rather than increase execution risk with a structure that real money investors have already shown reticence towards, issuers like Reliance should leverage all their strong selling points and simply issue longer-dated debt.
Reliance has already sold a successful 30 year dollar bond. Other issuers can too. When debt bankers are pushing for transactions in longer tenors, it makes little sense to try to convince investors to participate in a bond that is likely to end up trading well below par, with no prospect of redemption.