Perpetual bonds, defined as bonds with no maturity date, are becoming more recognised among Thai issuers and investors, enabling companies to raise funds without a higher debt ratio and letting investors reap high interest rates.
During previous decades, perpetual bond issuers were mostly commercial banks looking to strengthen their capital adequacy ratio.
Mr Tada says investors should do their homework so they're clear on the terms.
This type of bond allows issuers to raise funds without additional incurred debt, and the first call date is never less than five years from the date of issuance.
The bonds were unpopular among private enterprises until 2012, when SET-listed oil and gas driller PTT Exploration and Production Plc placed a perpetual bond for public offering valued at 5 billion baht with a 5.85% interest rate for the first 10 years.
In 2014, Indorama Ventures Plc (IVL) issued 15 billion baht worth of perpetual bonds with an interest rate of 7% for the first seven years.
Since that time, this hybrid instrument has become better known among the public and corporates, especially SET-listed companies.
There were 13 perpetual bond issues during the past four years, with a combined value of 56 billion baht.
According to the Thai Bond Market Association (TBMA), total outstanding value of perpetual bonds is 74.95 billion baht, representing 2% of total outstanding corporate bonds, with IVL's perpetual bonds poised to be the first tranche that meets a five-year call period in October.
"The market is monitoring the exercise of first call rights, as there have been some cases in China where issuing companies could not exercise such rights and redeem payment to bondholders," said TBMA president Tada Phutthitada.
For IVL, the risk of not calling is quite low because the current benchmark interest rate is lower than the company's perpetual bond interest rate of 7%, said Asmaporn Panjanavaporn, senior vice-president for debt capital markets at Siam Commercial Bank.
Issuing new bonds for refinancing can obtain a cheaper cost and avoid the dilution effect of a capital increase, Mrs Asmaporn said.
"Perpetual bonds are quite illiquid," she said. "Most institutional investors and mutual fund companies are not investors [in this type of bond], so perpetual bond holders should be able to accept liquidity risk."
Despite minimal supply in the market, many people have requested the option to purchase perpetual bonds because of attractive interest rates.
"This bond is likely to become more popular in the market because buyers have started to understand this type of debt instrument, while issuers have already recognised that there is a way to raise capital at the equivalent of equity," Mrs Asmaporn said.
Still, normal corporate bonds with a medium-term maturity period, defined as 3-5 years, and interest rates above 3% remain the most popular medium of fundraising in the bond market, she said.
Check the small print
For investors, Mr Tada suggests they read the terms of rights of debenture holders because these specify the interest rate and payment conditions.
Most perpetual bond issuers are not committed to paying interest. If a perpetual bond's interest is not paid, there will not be a dividend payment for shareholders.
"But in practice, most perpetual bond issuers will pay interest," Mr Tada said. "If the interest is not paid, investors will lose confidence and there will be an impact on a company's credit rating."
The second concern is how perpetual bonds will change status from capital to debt when the first call right is engaged or a five-year call period starts.
"We should observe the projects of the perpetual bond issuers," Mr Tada said. "If these projects find it difficult to break even or generate profit, issuers may have a higher risk of not engaging in the first call."
