MLT – BT

Will the love for perps last?

LAST Thursday, Mapletree Logistics Trust (MLT) sold $350 million worth of perpetual securities, a first for a real estate investment trust.

Naturally, MLT chief executive Richard Lai was happy over the successful sale, though some investors who had bought into Genting’s perps a week earlier were less elated.

Mr Lai said that the firm is very pleased with the strong response received for the securities, a landmark transaction for MLT as well as for the Singapore Reit market. The order book was over three times subscribed or more than $1 billion. The coupon for the MLT perps was 5.375 per cent.

Launched a week after Genting’s $1.8 billion perps issue, it likely caused Genting’s price to slide to $99.70 from $100.61 as some were said to have wanted to switch to a better name. Mapletree Investment Pte Ltd which owns 41 per cent of MLT is 100 per cent owned by Temasek. Both though have a similar Baa3 rating by Moody’s.

Penny stock mentality

Some might have been puzzled by the slide in Genting’s price. After all the deal received massive $6 billion of orders.

In the end it seems not many actually switched because they didn’t want to take a $1,250 loss, said one dealer.

It’s interesting that perps which are sold at $250,000 a pop and targeting rich investors with idle funds, have adopted an almost penny stock mentality.

Perps have become the latest investment fad because of their high yields of 4-7 per cent.

They have resonated with risk averse investors, many who have not touched the stock markets for a few years.

Yet, not all are buying them with a view of their long term income streams, it seems.

Still, a healthy bond market should be actively traded, but it is far from clear how much really is. That is one of the complaints from investors who have to rely on indicative quotes from their dealers or bankers and the spreads can be wide.

It’s also the reason why some private bankers and fund managers say that they dislike the current love affair with perps.

They cite the illiquidity of the instruments and the fact that issuers can redeem them as early as five years, so calling them perpetual securities with no maturity is puzzling.

Some say the current rash of issuance is not well understood by all investors which is unsurprising because the salespeople themselves barely know the instruments.

Many potential investors are sent SMSes the day the issue is launched with the indicative pricing and precious few other details.

In the current hot market, it would be difficult to find out more as the issue is snapped up in a couple of hours.

Many equate perps with plain vanilla bonds. But perps are equities and a major difference lies in the non-payment of the dividend or coupon. If the issuer decides not to pay the dividend of a bond, it is regarded as a default, a very serious event.

But the issuers of a perp can forgo dividend payment without triggering a default though many – not all – have put in features offering some protection in the event of a non-payment.

To be fair when bankers market these deals they do highlight the risks. For instance during the presentation for the sale of Global Logistic Properties perps, it was noted that the company has no track record of paying dividends.

Since listing here in October 2010, the company has yet to declare a dividend though the fact that GLP is linked to the government gives comfort that the perp coupons are likely to be paid.

It’s probably why SingPost perps which offer a lower 4.25 per cent coupon is selling at $101.55 since the company has a steady dividend track record since listing 10 years ago.

Popularity of perps

Even in the midst of perp offerings, a plain vanilla bond of Bank of East Asia (BEA) – also sold last week – attracted 72 per cent interest from the so-called ‘smart money’ or financial institutions. The order book for BEA’s $600 million bonds with 4.25 per cent coupon reached $3.5 billion.

Overall, the popularity of perps has helped Singapore grow its debt market though some observers have wondered if the enthusiasm may be getting a little frothy.

According to Thomson Reuters, year-to-date, the amount of perps sold are $3 billion compared to none same time last year.

Plain vanilla bond issuances so far are $7.5 billion against $4.1 billion in YTD 2011.

Whether the current burst of issuances can be sustained is anybody’s guess. More worrying is how many investors are first-timers, who have yet to see how these instruments will perform in a bear market or when the companies which issue them post losses.