YNH Residensi Bangsar South project. Perpetual bonds are typically secured by assets, which is why property developers have been able to issue billions of ringgit worth of perpetual bonds in Malaysia.
YNH Property Bhd
has decided to step up its interest payment on its RM263mil perpetual bond issuance, which it first issued in August 2019.
The call date for that tranche of bonds is Aug 7, 2024, but instead of redeeming the bonds, YNH Property has decided to pay the higher “step-up” interest of 8.85% from 6.85%.
Perpetual bonds are issued by issuers in perpetuity or for a very long period, such as 50 or 100 years. For YNH, the redemption date starts in the fifth year of their issuance. However, the issuer is not obliged to redeem the bond on that date. Alternatively, it can pay a higher interest rate.
YNH Property could be the first issuer of perpetual bonds in Malaysia to opt for a step-up instead of repaying on the call-up date.
In a written reply to StarBizWeek, YNH Property said it has sufficient cash flows to service the higher rates. The company also explained its decision.
“YNH Property Berhad is confident of its ability to service the increased interest payment on the perpetual bond. This confidence is underpinned by our strong cash flow management strategies and the robustness of our revenue-generating assets.
“We are actively engaged in discussions with serious parties regarding the potential sale of our AEON Manjung asset, which is expected to significantly enhance our cash reserves. Additionally, our Solasta Dutamas project has demonstrated strong unbilled sales, amounting to RM400mil, which provides a solid financial buffer and ensures a steady cash flow in the near term.
“These initiatives, along with our diversified portfolio, ensure that we can meet the higher interest obligations without compromising our financial stability,” says Datuk Dr Yu Kuan Chon, the company’s executive chairman, in the written reply.
On why the company opted for a step-up payment instead of redemption, he says: “The decision to step up the bond payment to 8.85% is a strategic move to honour the terms outlined in the original bond issuance, which included a step-up provision to offer bondholders an enhanced return over time.
“This decision is rooted in maintaining strong relationships with our investors and ensuring the continued attractiveness of our bonds in the market.
“Settling the bond outright was considered. However, retaining liquidity in the current economic landscape is crucial for strategic financial planning. This approach allows us to stay agile and ready for potential investment opportunities and operational needs that could drive further growth and stability for YNH Property.
“The step-up feature in perpetual bonds is a common market practice designed to offer better returns to bondholders over time, thus reinforcing investor confidence”.
That does make sense but still poses the question of whether the company will have sufficient cash flows and be able to unlock enough cash from its assets in order to make good the higher interest payments. Bear in mind, that the step-up interest will keep rising every year until the bond is redeemed.
There do seem to be some factors working against YNH Property.
One would be its depressed share price. It has not recovered from the crash early this year from close to RM5 a piece to around 50 sen now.
Second, it has been trying in vain for some time now to sell some of its landbank.
Could YNH Property issue another perpetual bond or corporate bond or take on a new loan to repay the current perpetual bond that is due? Technically yes, but realistically it may not be easy to convince investors.
That said, it has been done before. Yinson International Bhd, one of the larger perpetual bond issuers in corporate Malaysia, managed to settle a US dollar perpetual bond by issuing a ringgit-denominated perpetual bond.
It may seem a bit worrying but the fact that investors didn’t mind taking up the newer bonds means that the terms and protection clauses must have made it attractive. For instance, the newer bond was rated and offered a higher interest rate.
Perpetual bonds are typically secured by assets, which is why property developers have been able to issue billions of ringgit worth of perpetual bonds in Malaysia.
Many investors are high net worth individuals, craving for the high yield that these bonds offer.
But like all investments, risks abound. For example, who would have thought that Credit Suisse’s AT1 bonds (which were also perpetual bonds) would shrink to zero value? Of course, in that case, this was caused by the intervention of the Swiss Financial Market Supervisory Authority.
There is a controversial aspect to perpetual bonds that needs to be mentioned when discussing them. Considering that the bonds are issued in perpetuity, they are considered equity rather than debt on the company’s balance sheet because the issuer is not required to redeem them. The issuer’s gearing ratio is not affected. Calls are increasing for accounting rules to change so perpetual bonds are counted as debt.
There has been an increase in Malaysian public listed companies issuing perpetual bonds, although the total number of such companies accounts for only a small percentage of all Bursa Malaysia companies.
The outstanding amount of perpetual bonds is around RM20bil.
A number of smaller companies have been jumping onto the perpetual bond bandwagon. The safety of this asset class for its investors, who are mostly high net worth individuals, remains to be seen.
This article first appeared in Star Biz7 weekly edition.
