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Wednesday, 20 February 2019

Perpetual bonds to boost Chinese capital

Perpetual bonds to boost Chinese capital. Here’s why you should care: China’s commercial banks are due to issue a fresh round of perpetual bonds in a bid to boost capital, Sherry Fei Ju and Don Weinland write in the FT. The Bank of China’s first issuance in January proved popular with investors and generated RMB 40 bn (USD 5.9 bn) at a yield of 4.5%. Defined as a “non-redeemable bond with no maturity date that pays regular interest rates indefinitely,” a perpetual bond shares some qualities with an ordinary bond and some with equity. It pays a steady stream of interest payments forever, but also offers no mechanism for control over the issuer.

Risk is high…but so is the appetite: The need to replenish capital in China’s commercial banks comes ahead of an anticipated slowdown of the country's economy, and perpetual bonds may prove to be a serviceable way of achieving this. Although BNP Paribas notes that the risk attached to a perpetual bond is “considerably greater than that in a classic bond,” January’s bond still “received a widespread welcome from market investors.” It may not be the only place where appetite for the security is high. In the US, there is apparently a school of thought that perpetual bonds could be more efficient for the government to issue than ordinary bonds, as the lack of maturity dates means refinancing costs could be avoided.

Fun fact: One of the oldest examples of a perpetual bond was issued in 1648 by the Dutch water board of Lekdijk Bovendams, and the interest is still being paid today. Perpetual really does mean perpetual.

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