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Retail investors in Hyflux bind: Issuing of perpetual bonds should be better regulated

If there is any lesson to be learnt from the financial debacle of debt-ridden water treatment company Hyflux, it must relate to the issuance and investment in perpetual bonds or securities.

Retail investors in Hyflux bind: Issuing of perpetual bonds should be better regulated
Christopher Ng Wee Chung

If there is any lesson to be learnt from the financial debacle of debt-ridden water treatment company Hyflux, it must relate to the issuance and investment in perpetual bonds or securities.

To state caveat emptor — or that all investments carry some risk — is as good as saying the problem is solely with the demand side (the investors), while absolving the supply side (the listed companies and banks) to exercise any due care and responsibility.

At the heart of the issue is: Are perpetual bonds for everyone? And are all listed companies on the stock exchange free to issue perpetual bonds or securities as they wish?

Governments and companies issue bonds to raise funds. When you invest in bonds, you are lending money to the issuer in exchange for an interest payment.

A perpetual bond is a bond with no maturity date and there is no obligation by the issuer to repay the principal amount, and therefore, it may also be treated as equity (capital).

Hence, it can be attractive for listed companies that are already highly leveraged to issue perpetual bonds, because it would not show up as debt on their balance sheets.

While it is an attractive financing structure to raise funds from the capital market, there should be regulations targeted at the issuance and investment in perpetual bonds to protect retail investors.

Firstly, only listed companies with a proven, stable and long-term revenue stream — such as those with infrastructure or private-public partnership projects that can be easily monetised — can be allowed to issue such bonds after having shown a demonstrable track record.

This is to avoid a replay of what Hyflux is going through.

Secondly, because perpetual bonds have no maturity dates and there is no obligation to repay the principal amount, only investors who are above a certain level of net worth should have access to the product. And even so, this should be limited to a certain percentage of their net worth, for example, 10 per cent.

This is to ensure only those who have the wherewithal and appetite to risk not getting back their principal sums can dabble in such a product.

In the absence of strict regulation governing the issuance and investment in perpetual bonds, the risk of moral hazard would only heighten.

A case in point is the Hyflux saga, where funds raised from perpetual bonds and preference shares (hybrids that have the properties of both equity and debt instruments) amounted to about S$900 million, which was being used to finance the construction of Tuaspring and the firm’s infrastructure projects.

National water agency PUB has said that in the event of a default, it may step in to take over the plant at zero dollar, as per the water purchase agreement.

The point to note is this: Perpetual bonds are items off the balance-sheet, and they do not feature as debt or equity. This absolves the issuer from liabilities and allows the company to avoid any share dilution — placing it in the best of both worlds.           

Related topics

investors Hyflux perpetual bonds securities risk

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