Asian Perps Face Non-Call Risk

Investors received a pleasant surprise when FULLERTON HEALTHCARE exercised the call option on US$175m perpetual bonds on Monday, but some other Asian issuers are expected to struggle when their first call dates come due later this year.The Asia Pacific-focused healthcare network operator’s bonds were bid at a cash price in the low 90s, implying a yield to call in the high teens, before it announced the redemption. 

The senior notes came with a reset to Treasuries plus 548.8bp and a 500bp step-up if the bonds were not called on April 6, raising the coupon to around 11%. Given that clear incentive to call the perps, the secondary price suggested that investors were worried not only about call risk but also the company’s ability to keep up with its payments. 

Fullerton had been hoping to complete a Singapore IPO by the time of the call date, but said it repaid the bonds with a combination of internal and external funding.Current trading prices suggest that investors do not expect some other Asian issuers to redeem their bonds when they turn callable in the coming months.“The negative sentiment will reverberate if they don’t call,” said a DCM banker. 

“A lot of these perps have not been priced as though they are really perpetual.”HONG KONG AIRLINES, part of the highly indebted HNA GROUP, has US$683m of 7.125% perps callable on July 26. The bonds, bid at a cash price in the low 50s according to Refinitiv data, reset to three-year Treasuries plus 558.8bp plus a 500bp step-up if not called.Car dealer CHINA GRAND AUTOMOTIVE SERVICES has US$400m 5.625% perps callable on October 30 that are quoted at a cash price of 73. 

If not called, the distribution rate will reset to the initial spread of 390.9bp over three-year Treasuries, plus a 500bp step-up.Chinese investment bank AMTD GROUP has a US$123m 7.625% perp that is callable on June 15 and would step up to three-year Treasuries plus 616.1bp, as well as a 500bp step-up, if not called. AMTD repurchased US$77m of the original US$200m principal on December 19 last year, and the bonds are now trading at a cash price of around 88. 

All three rank as senior debt. With the three-year Treasury yielding around 0.35%, that would mean those issuers will see coupons increase to between 9.25% and 11.50% if they decide not to call.A series of skipped call options might help change the mindset of some Asian investors who tend to expect issuers to redeem their bonds at the first opportunity.  

“Perps have sold like hotcakes through private banks with the understanding that they will be called, otherwise there will be reputational risk [for the issuers],” said a bond investor.The investor noted that a growing number of issuers in recent years opted not to call perps or capital notes when it did not make economic sense. In 2018, Chinese property developer Agile Group Holdings did not call a US$700m subordinated perp at the first call date, even though it meant the coupon stepped up to 10.215% from 8.25%. “In this environment there will be more failures to call,” said the investor.