Cover Story: Perpetual bonds still garnering interest

TheEdge Thu, Apr 18, 2024 02:10pm - 1 month View Original

This article first appeared in The Edge Malaysia Weekly on April 8, 2024 - April 14, 2024

WHILE Malaysia-listed companies were seen to be improving their balance sheet position in 2023, the number of perpetual bond issuances rose during the year, data compiled by The Edge show.

At least 28 public-listed companies have outstanding perpetual bonds — also known as perpetuals or just “perps” for short — totalling a little over RM19.9 billion, up from RM18.7 billion a year ago, with a total of RM1.25 billion in net issuance in that period.

From 73 perpetual bonds at the start of 2022, the number of outstanding perps by Malaysian companies have risen to 82.  Previously more prominent among larger companies, there are now more smaller-cap companies issuing perpetuals as well.

Among those that issued new perpetual securities in 2023 is DRB-Hicom Bhd (RM550 million), including RM200 million for working capital, investment activities and other general corporate purposes, as well as RM350 million by 70% owned Bank Muamalat to finance its Islamic financing activities, working capital requirements or investment activities.

As a result, DRB-Hicom’s perps (including accrued interest) have risen to RM905.2 million, from RM354.02 million, for which it distributed RM28.43 million  in coupon payments to perp holders in the last financial year.

As at its latest quarter, DRB-Hicom had a net gearing ratio of 0.22 times. Categorising the perps as debt would raise its net gearing to 0.34 times, calculations show.

The diversified group also had RM769.18 million in liabilities under redeemable convertible cumulative preference shares (RCCPS), backed by RM669.27 million of the equity instrument.

Meanwhile, renewable energy outfit Cypark Resources Bhd raised an additional RM265 million via perps in 2023, bringing its total issuance to RM500 million, from RM235 million a year before.

Its net gearing ratio would rise from 1.04 times to 2.38 times should the perps be considered as borrowings. In the first nine months of FY2024 (9MFY2024), Cypark paid RM17.96 million to its perp holders after booking a loss of RM26.69 million in the same period.

Cypark’s net gearing would jump the highest if its perpetuals are categorised as liabilities, followed by Pestech International Bhd (3.33 times, from 2.45 times), YNH Property Bhd (1.51, from 0.76 times), WCT Holdings Bhd (1.31, from 0.79), and TH Plantations Bhd (1.05, from 0.58).

When contacted, a spokeswoman of Cypark explains that the additional fundraising was mostly for its large scale solar projects (LSS2 and LSS3), as well as for refurbishment of its waste-to-energy plant. The WTE plant is currently operating “consistently”, the spokeswoman says.

Chin Hin Group Bhd also issued perps last year (RM30 million in December 2023).

Those who have redeemed their perpetual bonds include Sunway Bhd (RM600 million in 2023), Mah Sing Group Bhd (RM645.21 million in 2022), as well as floating upstream oil and gas vessel operator Yinson Holdings Bhd (US$100 million in 2022). Yinson has also redeemed US$120 million (about RM567 million) worth of its outstanding perps this month. The papers were issued in March-April 2019 with a coupon rate of 8.1%.

This leaves Yinson with two other perps, namely its five-year, 7.5% RM360 million sukuk with its first call date in 4Q2027; and a 15-year, 6.8% RM950 million sukuk callable in May 2033.

Commenting on Yinson’s balance sheet, UOB Kay Hian wrote in a recent report that “None of Yinson’s project loans are at default risk, and Yinson’s leverage is now comparable to SBM Offshore NV, both being top-tier global FPSO (floating production storage and offloading) contractors”.

“Our analysis shows that its ratios are still healthy if applied using SBM Offshore’s directional reporting,” the research house said, referring to additional accounting treatment adopted by SBM, a Dutch FPSO player, to address the disconnect between earnings and cash flows due to projects categorised as finance lease.

Yinson, which has a charter order book for nine floating offshore vessels, has also raised RM283 million through a private placement of 3.96% of its enlarged share capital to fund its solar plant project exposure in Peru.

All other things being equal (after deducting the redeemed US dollar perps and adding the private placement funds), categorising the remaining perps as liability would lift Yinson’s net gearing to 1.86 times, from 1.68 times. The group paid RM136 million to its perp holders in FY2024.

Yinson’s outstanding perp exposure of around RM1.3 billion is behind Sime Darby Plantation Bhd (SimePlant) (RM2.23 billion) and Hong Leong Bank Bhd (RM1.7 billion).

After reporting a net profit of RM1.86 million in FY2023, SimePlant paid RM124 million to its perp holders in FY2023, apart from RM643 million in dividends to shareholders. Recategorising the perps as borrowings would raise SimePlant’s net gearing to 0.61 times, from 0.26 times.

Other issuers of sizeable perpetuals are Top Glove Corp Bhd (RM1.17 billion, RM46 million distributed to perp holders in the last financial year); Sime Darby Bhd (RM1.1 billion consolidated from UMW Holdings Bhd’s books following its acquisition of the latter); and Malaysia Airports Holdings Bhd (RM998 million, RM57.5 million distributed last year).

Non-listed companies with outstanding perps include Boustead Holdings Bhd (RM365.35 million) and THP Suria Mekar Sdn Bhd (RM67.84 million).

Perpetual bonds are bonds that do not have maturity dates. Upon arriving at the predetermined call date, the issuers have the option to either redeem the bond by paying the principal to the bondholder, or to continue paying the coupon, typically at a higher rate, until the next scheduled period.

As the bond theoretically does not mature, it can be categorised as equity, rather than liability on a balance sheet statement. In this scenario, a company could gear up without lifting its gearing ratio.

On top of that, coupon payments for the perps are not booked under finance costs in the profit and loss statement. Instead, they are treated like dividends, and deducted after net profit to equity holders. Simply put, the coupon payments of perps will not eat into company earnings. Besides, perps help companies to keep the leverage ratio at a healthy level while being able to raise funds that they need.

Nonetheless, there is ongoing debate over whether perps should be put under liabilities, instead of equity. That said, there are companies that voluntarily categorise their perps as liabilities, one example being Sunway for its RM600 million perpetual sukuk which was redeemed last year.

In Malaysia, those that issue perps include banks (to meet capital requirements — perps can also be categorised as Additional Tier 1 (AT1) capital with equity-like feature).

Former Bank Negara Malaysia governor Tan Sri Nor Shamsiah Mohd Yunus said in March 2023 that these bonds are more “senior” than equities in the case of resolution. The remark was made when the Swiss Financial Market Supervisory Authority (Finma) decided to write off Credit Suisse’s AT1 bonds but pay stakeholders US$3.2 billion.

Banks that have perps include CIMB Group Holdings Bhd, which issued an additional RM400 million perps last year, raising its AT1 perpetual subordinated capital securities to RM2.15 billion. Other issuers include Hong Leong Bank Bhd, Affin Bank Bhd, Malayan Banking Bhd, Bank Islam (M) Bhd, and Alliance Bank (M) Bhd.

Issuers of perps also comprise companies in capital-intensive businesses such as oil and gas infrastructure, conventional and renewable power plants, transport infrastructure such as airports, and property development.

Apart from perpetuals, companies also issue other preferred securities to raise funds while making it more attractive than common equities. More than two dozen companies have issued convertible preference shares as well as loan stocks either through placements or rights issue, which allows shareholders to participate.

While they are categorised as equity, they typically carry distribution obligations, which again are usually deducted from a company’s net profit.

At 28 companies, the number of listed corporations that incorporate perps as a fundraising component is much smaller compared with over 900 companies that are on Bursa Malaysia.

And based on improved balance sheet position in a majority of the listed companies, Corporate Malaysia is seen as still prudent in its financing exercise.

However, investors will closely watch companies with perps that contain step-up coupon rate features. Otherwise, what started as an attractive financial instrument that is used to manage gearing level could turn into burdensome commitment, if not redeemed as planned in time.

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