The lure and risks of perpetual bonds

YNH plans to sell its seven-storey retail shopping centre known as 163 Retail Park to Sunway Real Estate Investment Trust for RM215mil.

THE issuance of perpetual bonds by large corporations in Malaysia is not new.

Many large listed corporations use it as a funding mechanism. Besides banks, property developers have also issued perpetual bonds.

Yinson International Bhd, a maker of vessels for offshore oil and gas production, is one company that has undertaken large perpetual bonds.

Yinson, a giant player in its field, has also entered the renewable-energy space in a big way with a market capitalisation of about RM8bil. It recently announced that it would issue a rated perpetual bond with a 7.5% yield.

That attractive yield has got accredited investors scurrying to take up those bonds.

But are these investors fully aware of the risks of buying such bonds, which are sold at a minimum bite size of RM250,000?

There have been no perpetual bond defaults in Malaysia since they became popular with large corporations. However, all investment products carry their own risks.

The lure of the Yinson perpetual bonds is obvious. According to one fact sheet about the issuance, the eye-popping factor is that the “indicative total income” for the investor with an investment of RM250,000 will be RM103,125 after five years. That’s a decent 40% gain, although it will be paid out in tranches, twice a year over the next five years.

It is up to perpetual bond issuers to decide when or whether to repay the bonds, but there is typically a five-year redemption period after which the issuer must pay an interest rate increase if it doesn’t redeem the bonds.

Ultimately, the risk of perpetual bonds is that the issuer could face a cash flow problem and not be able to service the bond, let alone pay it back. In Yinson’s case, the papers are rated A-IS by MARC Ratings with a stable outlook. A-IS refers to a “strong ability to make payment on the instrument issued” but based on MARC Ratings criteria, it also means “risks are greater in periods of business and economic stress.”

Yinson is in a capital-intensive industry. Companies in this segment typically have high borrowings.

MARC Ratings also points out that Yinson is expected to borrow more for its ongoing projects, with total borrowings expected to peak at around RM21bil by FY2026.The latest Yinson offering is to refinance the group’s earlier issued unrated US$120mil (RM566mil) perpetual bonds due in March and April this year.

Yinson has a healthy order book and its earnings are driven mainly by charter rates. The risk factor is that if charter rates fall for some reason, then companies like Yinson could face problems.

Just last year, Tropicana Corp Bhd which had issued perpetual bonds, faced challenges — MARC Ratings downgraded the bonds last April and they were assigned a negative rating outlook. The ratings agency had then said that the downgrade was the result of “Tropicana’s continued weak financial performance and slower-than-expected asset disposals that would have eased its tightening liquidity position vis-à-vis its near-term financial obligations.”

Tropicana got into this situation after certain asset disposals didn’t go as planned. In the end, the property developer was able to fulfil all its bond obligations after it disposes of some of its assets.

This year, the focus will be on YNH Property Berhad, a part of the group of stocks that recently experienced an aggressive selldown.

Its market capitalisation has plummeted from around RM2bil at the start of the year to a mere RM354mil at present. With so much of its equity value wiped out, the question is, how will its debts fare?

YNH Property has term loans and has issued corporate bonds as well as perpetual bonds.

On Jan 18, MARC Ratings downgraded YNH Property’s corporate bonds — the second such downgrade with the first being last November. The bonds, which are on MARCWatch Negative, are now rated BBB+IS.

The company has RM320mil in outstanding corporate bonds that are due on Feb 28 next year and Feb 26, 2027.

It is YNH Property’s perpetual bonds that are of much interest. It is an unrated bond.

On Aug 7, 2019, the company made its first issuance of RM263mil in perpetual bonds. As perpetual bonds were classified as securities, the issuance was called “unrated perpetual securities”.

Going by new accounting standards, these perpetual securities are now increasingly being classified as debts and not securities.

On July 30, 2020, YNH Property made a second issuance of RM87mil of the perpetual bonds.

Both bonds carry an interest of 6.85% per annum and have the usual step up in interest payment if not recalled within five years. The first tranche’s five-year tenure arrives in August.

Asset-rich YNH Property has been seeking to dispose of some of its land and properties to meet its obligations. No sale has been done yet.

As MARC Ratings points out, YNH Property’s situation is “compounded by further delays in sale of assets that would have provided a much-needed cash infusion.”

On Monday, YNH announced its plan to sell its seven-storey retail shopping centre known as 163 Retail Park to Sunway Real Estate Investment Trust for RM215mil.

Prior to this, YNH Property had also proposed to sell a five-acre plot of land in Desa Sri Hartamas to Sunway Group for RM170mil, but Bursa Malaysia raised many questions about that deal. The sale is still pending.

YNH Property may struggle to fulfil its debt obligations, including the repayment on its perpetual bonds. If Tropicana was the close call for perpetual bonds last year, this year all eyes will be on YNH Property.

This article first appeared in Star Biz7 weekly edition.

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