THERE are major differences between perpetual capital securities and perpetual bonds, and these terms should not be used interchangeably (‘Genting S’pore reaches out to retail investors’, last Tuesday; and ‘Genting may be a sure bet but know risks of perpetual bonds’, last Wednesday).
A bond is an IOU, and is listed as a liability on the balance sheet of an issuer, whereas perpetual capital securities are accounted as capital of the issuer.
Also, a bond receives regular coupon payments; perpetual capital securities receive dividends/distributions (at the discretion of the issuer). A missed coupon payment on a bond can result in a credit event or default. In contrast, perpetual securities can afford to miss dividends/distributions without any credit event.
A bond is ranked above a preference share and, in some cases, has the same ranking as creditors; perpetual capital securities may rank lower than creditors, or in line with preference shares.
It should also be noted that bonds, preference shares and perpetual capital securities are all plain vanilla or straight instruments and have been in existence for a long time.
In the case of the various perpetuals that have been issued in the Singapore market in the first quarter of this year, for example, those by Genting and Ascendas, they are not convertible; giving the impression that these products are hybrids is inappropriate.
A hybrid refers to a product that has equity and bond features, for example, convertible preference shares or convertible bonds. Thus only those securities that have both the characteristics of bonds and equity would qualify as hybrid securities.
I am unaware of any current perpetual bond issue in the Singapore market, though they may exist elsewhere.
Why would someone wants to be indebted for life, to pay out coupons indefinitely unless you have no money and unable to pay back your creditors, creating perpetual bonds has great risks a company needs to undertake to pay out a % of their profits annually, unless their income is perpetual, or you can expect within a lifetime they will definitely default. If I want to buy perpetual bonds, I will make sure the company has means of income for at least 50 years, the company has already set the rules for takeover once the director dies, and the rate of coupon returns justify my investments. If the risks is too high I might as well refuse to invest.
If I want to create Tier 1 capital, I rather create convertible bonds which pays coupons yearly until maturity, then a fixed value to exchange back my bonds I issue, or if I have not enough capital, to reissue a combination of preference and ordinary shares, depending on how much control I want from my company. If I can create ROI of between 40% to 60% annually, will I have worry about such fuss? Everyone will come to me to invest, I can raise my capital privately without any help from underwriting. Of course if I want to keep some of the profits I can easily offer the highest returns and keep a % for myself. But this methodology is meant for my personal consumption, if I have to raise money for the UN to fund all it’s causes, a 40-60% return will kill me, it is not possible at any rate to raise so much money and give so high a rate of returns, I have many ways and arrangements to solve the funds required by the UN, and I do not have to worry about money anymore. When I get to the UN, the first thing I will do is to stop all privacy of Swiss Bank accounts, there should not be any hidden assets, and therefore no more corruption.
To raise funds for the UN, I can easily setup a public holding company eg “Perpetual Holdings Public” and use my inventions to raise the following;
The Brain and Developing Intelligence to raise US$500 Billion using convertible bond with a maturity of 50 years paying a yearly coupon rate higher than the Feds. I could spread my other inventions with 5 years interval to raise US$500 Billion for Intelligent Software likewise and maybe another US$100 Billion for 3D Search Engine with intelligent searches, The Greatest Lie Detector and Principles of The New Economy. That is easily a total of US$1300 Billion with an interval of 5 years each, total 25 years spread all with maturity over 50 years, which is equivalent to my lifetime, where all borrowings can be returned upon completion of all research and projects, and could easily be funded internally by the World Bank and IMF, and should be more than enough for UN needs to solve Hunger and Poverty, Disease and Death with solving Crime for many years. The estimates are very conservative, a lot depends on how many completed products of technologies I and UN can research and bring to the markets, it could be easily 10 times the amount if we include the research in the prevention of diseases. Notwithstanding, I am also capable of modifying technologies to create an entire army of defence equipments for the UN, creating it’s own aircrafts, aircraft carriers and Air Defence Systems etc. I have the capabilities to create intelligent command and control system with automated robotics for defence equipments, everything automated, without human intervention, just press a button.
– Contributed by Oogle.