Perpetual Bond: A capital market instrument and step forward for developing the bond market
The coupon payments on perpetual bonds will, theoretically, be paid forever – in perpetuity – hence the name, perpetual bonds
Perpetual bonds are bonds with no maturity date. They pay interest to investors in the form of coupon payments, just as with most bonds, but the bond's principal amount does not come with a set date for redemption (repayment). The coupon payments on perpetual bonds will, theoretically, be paid forever – in perpetuity – hence the name, perpetual bonds.
Additional Tier 1 (AT1) bonds are issued to raise Additional Tier 1 capital; as per the Basel III norms, they ensure that a financial institution's capital requirements are met. Perpetual bonds are seen as riskier quasi-debt instruments which do not have fixed maturity. Issuers pay coupons on these forever. The price of such a bond is the coupon amount divided by a constant discount rate. Since they have no maturity date, investors can get their investment back only by selling them in the secondary debt market, unless the issuer calls the bonds back, i.e., redeems them.
Generic Features of Perpetual Bond
Keep updated, follow The Business Standard's Google news channel
The generic features of the currently issued perpetual bond are detailed below.
|
Name of the Instrument |
Perpetual Bond |
|
Issue Type |
Unsecured, Contingent-Convertible, BASEL III compliant, Perpetual Debt instrument for inclusion in Additional Tier I Capital |
|
Nature of Instrument |
Unsecured |
|
Purpose and Objectives |
To raise Additional Tier-1 Capital to strengthen its capital base in accordance with Bangladesh Bank's Guidelines on Risk-Based Capital Adequacy (Revised Regulatory Capital Framework in line with Basel III). |
|
Mode of Issue |
Private Placement |
|
Face Value Per Lot |
Tk1,000,000 |
|
Bonds per lot/ Minimum Subscription |
1 |
|
Tenure |
Not Applicable. The bonds shall be perpetual, i.e., there is no maturity date and there are no step-ups or other incentives to redeem. |
|
Investors |
|
|
Coupon Rate |
Reference Rate + Coupon Margin |
|
Reference Rate |
20-year Treasury-Bond rate. |
|
Coupon Margin |
2 percent |
|
Coupon Range |
|
|
Coupon Discretion |
The bank will have full discretion at all times to cancel distributions/payments of the bondholder initiating from the Trigger Point Condition Date and shall be dealt with as per the Payment Suspension Methodology. |
|
Coupon Payment Frequency |
Semi-Annual but subject to Issuer's Coupon Discretion. |
|
Put Date |
Not Applicable |
|
Put Price |
Not Applicable |
|
Call Option |
|
|
Call Option Eligibility |
|
|
Loss Absorption |
After the Trigger Point Condition Date, conversion of the outstanding principal of the Bonds to common shares at the Conversion Strike Price by such amount not exceeding the amount which would be required to bring the consolidated Common Equity Tier 1 (CET 1) ratio to 4.5 percent of the RWA. |
|
Conversion Strike Price |
Average of 180 business days market price prior to the 3rd quarter-end date on which issuer's consolidated CET-1 falls below Bangladesh Bank requirement (currently 4.5 percent) or Par Value (Tk10) whichever is higher. |
|
Common Equity Holders' Dividend Stopper Clause |
During any non-payment of the interest of the bonds by the issuer, the issuer shall not, (i) declare or pay any dividends or distributions or redeem, purchase, acquire or make a liquidation payment on any of the issuer's capital stock or (ii) make any payment of principal of or interest or premium, if any, on, or repay, repurchase or redeem, any debt securities of the issuer (including other junior subordinated debt securities or other junior subordinated debt) or (iii) make any guarantee payments on any guarantee by the issuer of the debt securities of any of its subsidiaries (including under other guarantees of junior subordinated debt securities or other junior subordinated debt). |
|
Listing |
The Bonds will be issued subject to the consent of the Bangladesh Securities and Exchange Commission (BSEC) and to be listed as per the prevailing rules and regulations of the BSEC. |
|
Transferability/Liquidity |
Freely transferable per the provisions of the Deed of Trust. |
Source: Collected from an information memorandum issued by a lead arranger
Only a few clauses are mentioned here.
Current Perpetual Bond Market in BD
Currently, few banks are raising additional Tier-II capital through the perpetual bond instrument.
|
Bank Name |
Issue Size in MN |
Coupon Floor Rate |
Coupon Celling Rate |
Margin |
|
Mutual Trust Bank Ltd. |
4,000.00 |
6.00% |
10.00% |
2.00% |
|
United Commercial Bank Ltd. |
4,000.00 |
6.00% |
10.00% |
2.00% |
|
National Credit and Commerce Bank Ltd. |
5,000.00 |
6.00% |
10.00% |
2.00% |
|
The City Bank Ltd. |
4,000.00 |
6.00% |
10.00% |
2.00% |
|
Trust Bank Ltd. |
4,000.00 |
6.00% |
10.00% |
2.00% |
|
One Bank Limited |
4,000.00 |
6.00% |
10.00% |
2.00% |
|
First Security Islami Bank |
6,000.00 |
6.00% |
10.00% |
2.00% |
|
Social Islami Bank Limited |
5,000.00 |
6.00% |
10.00% |
2.00% |
|
EXIM Bank Limited |
6,000.00 |
6.00% |
10.00% |
2.00% |
|
Total |
42,000.00 |
- |
- |
- |
Among them, only Tk400 crore issued by The City Bank Limited has been fully subscribed.
The issuer has several advantages to raise capital through issuing perpetual bonds because unlike Tier-II subordinated bonds, perpetual bonds have only a one-time flotation cost, cheaper than common stock, having call option issuer has the right to retire the bond and issue a less costly bond.
On the contrary, the investor should consider the following before investing in perpetual bonds.
- Liquidity: This is a new instrument and has no secondary market. If a proper secondary market is not established then the investors will have no way of unloading the investment. However, the bonds are freely transferable in accordance with the provisions of the Deed of Trust.
- Asset quality and capital management of the issuer: Increasing NPL and weak capital management will reduce the distributable profit which ultimately reduces the probability of providing coupon income.
- Corporate Governance: Good corporate governance and status as well exposure of the BoD is important
- Long term share price of the issuing bank: Assessing intrinsic value based on fundamental analysis. Moreover, the investors must incorporate the distressed economic situation in the valuation.
- Inflation risk and interest rate risk: Higher inflation rates and long term interest rates view is very essential. Due to the coupon cap at 10 percent, the investors cannot avail of higher rate benefits.
- Repayment date risk: The issuer has the full discretion to cancel the distributions/ payments of the bonds
- Capital market exposure: Currently, these instruments are not listed but will later have capital market exposure once it is listed in the capital market.
The steps that need to be taken by the regulator
Considering the nature of the perpetual bond, scheduled banks and NBFIs are likely to be the major investors. The following should be resolved immediately to fully subscribe to these instruments.
- Ensure individual participation:
The investor may facilitate individual investment by making regulations that allow perpetual bonds worth Tk10,000 or Tk100,000 to be issued.
- Sinking fund issue:
For bonds (convertible/non-convertible) and debentures issued by institutions other than PSEs (public sector entities), initially, the issuer must maintain a sinking fund of 10 percent of the instrument issue size. Subsequently, the issuer also has to contribute 3 percent of annual revenue into sinking funds until maturity. This criterion is only applicable if a bank has made investments in this instrument. As a bank-based economy, to develop the bond market, the regulator can modify the rule depending on their research and judgment.
- CIB reporting issue:
As per DOS circular-04 dated 26 May 2019, banks are instructed to report these types of investment in the CIB portal of Bangladesh Bank. Bangladesh Bank should solve and enforce this issue for proper and transparent reporting. CIB reporting system currently is utilised only for reporting loans and advances.
- Capital market exposure:
These types of instruments are non-listed securities. In the future, the perpetual bonds may be listed in the capital market and expose bank investments to capital market risks. As with Tier-II debt instruments, the regulator should consider whether there is any scope for keeping perpetual bonds outside of capital market exposure.
