Invest in Perpetual Bonds in India

You can now easily invest in Perpetual Bonds in India

Introduction of Perpetual Bonds in India

Perpetual securities are fixed income securities in India with no fixed maturity date. Investment in Perpetual bonds issuances are done by credits from the investment grade space, preferably with Sovereign-Owned Entity (SOE) background. Issuances from stable sectors get good reception from investors. However, when markets are heated up, they are open to lower quality issuers also. This year, markets witnessed perpetual issuances in the high yield bonds Investment space from companies operating in cyclical sectors such as property development.

The coupon rate on these bonds is usually higher than that on other longer dated bonds. Coupon deferability is a feature which allows the issuer to defer the coupon payments and is favorable to the issuer. This gives equity like types of bonds in India, where in there is no fixed payment to be made by the company. Investors chasing higher yields may get attracted by perps. However, they need to understand that higher yield may not materialize if the coupon deferability option is exercised.

Step up rate is a feature that offers some investor protection. Generally after a fixed period, say five years, the coupon rate will be increased by a fixed amount called step up rate. Callability is another feature of perps and perps are generally callable after five years. If step up rate is low, there is a risk that Perpetual Bonds may not get called by the issuer. If investment in Perpetual Bonds have been issued at very low coupons and with loose covenants, investors bear the increased risk on non-payment of bonds. Fixed income investors have to go through the bond prospectus in detail to assess the various features of these securities.

Final Call about Investment in Perpetual Bonds in India

Liquidity risk is another risk that the investors need to be aware of. There is a risk of bondholders not receiving their principal amount if issuers choose not to redeem the perps. Then tradability of perps in the secondary markets gives an exit option. However, the investor group investing in perpetuals bonds is limited, and hence liquidity of invest in bonds in the secondary market becomes critical for purchasers of perpetual papers to sell the paper easily.

Interest rate risk is another key risk faced by the investors. As the duration of perps is higher, the interest risk is also higher. In an environment of rising interest rates, the value of the perps will decline significantly and issuers will have no reason to call the perps. As the US economy rebounds, interest rates are expected to rise. The positive data flowing out of the US has heightened concerns about tapering of Quantitative Easing (QE) and resulted in widening of yields on US treasuries. Recently, markets have seen massive sell off in longer duration bonds and perps. You can Buy bonds online, investment in Bonds online, Where to invest in Bonds in India and How to invest in Bonds in India.

When markets are at their peak, companies try to take advantage by locking in low coupon rates for perpetual investment in Bonds, and improve their capital structure. In 2013, companies managed to place perpetuals with loose covenants and considerably in favor of the issuer. Agile Property, a benchmark China property credit, issued perps at par. These bonds have underperformed since their issuance and are trading way below par. KWG Property, another Chinese developer, marketed perpetual securities but didn't find favor with investors as they began to understand the risks involved. The company had to drop the proposed issuance.