Perpetual Bonds Perpetual Bonds, also known as Perps are bonds which have no maturity date. This implies that the bondholder only gets coupons from the bond while there is no principal payment unlike conventional bonds. Perps are sometimes considered quasi-debt instruments due to its debt and equity-like characteristics – debt like in terms of coupons and equity like due to a higher risk for example as compared to a normal bond. In terms of capital structure seniority (i.e., priority of repayment with regard to default or liquidation), Perps come above Common Equity and Preference Equity but below secured bonds, unsecured bonds and guaranteed bonds. Perps are issued by both non-financial and financial companies.
Most perps are callable (the option for the issuer to buyback the bonds based on several factors) and are generally called. This might lead the bondholder to think that the perps they hold will be called and thus he/she will get back the investment/principal which is not true. The issuer may decide not to call back the bonds if the conditions prevalent at that time don’t suit the issuer. One of the categories of Perps are what are known as CoCos which are considered as Additional Tier 1 (AT1) Capital, issued by banks. These are majorly issued as part of providing a cushion on their capital base which could help them during times of duress. CoCos are known as Contingent Convertibles and these bonds can be converted into equity, partly or fully, if the bank’s Common Equity Tier 1 (CET1) capital goes below a certain threshold, say 7% or it’s like. Given the inherent risky nature of these bonds, they generally give higher yields. Another factor in looking at Perps is to see the clauses mentioned. Many a time there could be coupon step-ups, non-cumulative coupons or discretionary coupons, principal write-downs and similar conditions to name a few examples which investors or potential investors have to be aware of which makes it important to look at the prospectuses of these issuances. There is another category of Perps known as ‘fixed-for-life’ Perps – the investor only gets fixed coupons over the life of the bond with any callable features etc. For example, the Philippine conglomerate Ayala Corp raised $400mn in fixed-for-life Perps end-October 2019 at a coupon of
4.85% - no coupon resets, step-ups etc. They had also done a similar $400mn fixed for life Perp issuance in 2017 at 5.125%. Overall, Perps are a common type of issuance in the markets and investors must take the responsibility of reading through the documents and understanding the risks of these bonds to make calculated decisions.