What drives issuers to redeem their perpetuals
Since our publication of Perpetual Series 6 titled “Picking up nickels” on Sept 11, 2020, in which we cautioned against chasing certain perpetuals which have higher noncall risks, the steam-roller has run ahead with a sharp rise in rates which impacted prices. Year-todate, total returns of most perpetuals are negative, with the simple average price down about 4.5%. The decline is in line with the rest of the SGD corporate bonds, which in turn has outperformed those in the Asia dollar and USD space.
Aside from rising rates, prices have fallen due to the increase in extension risk. Thus far, eight perpetuals remain outstanding past their first call date in the SGD corporate perpetual market. Aside from those whose issuers are in default or restructuring (for example, HYFSP 6.6212%-PERP, EZISP 0.25%-PERP), the remainder were not called because it was more expensive to issue a replacement perpetual, in our view. Replacements are more expensive given that spreads in the market have increased, which increases the cost of issuance (distribution rate of a perpetual is usually based on adding a spread to a reference rate).
