Jonathan Rogers, IFR Asia Senior Credit Analyst
I recall, as I’m sure you will, the perp “crisis” that hit the Eurobond market in the late 1980s. In those days of dodgy hairdos and electropop, Alan Greenspan was the unquestionable Master of the Universe, and I was a junior institutional bond salesman at Nomura in London.
Back then, if you happened to ask the FRN traders for a firm price on a perp, the request would be greeted with a wry smile or an ironic guffaw and a response containing a deeply discounted bid and a two-way you could drive the proverbial bus through.
Before the perp meltdown, which straddled the 1987 stock market crash, had come a bonanza for Eurobond issuance, unsurprising since we were in the midst of a secular Treasury bull market (which is intact to this day). Issuers fancied the idea of paying three-month floating coupons in notional perpetuity when rates still had a long way to fall. As we all know, the excess supply of a boom tends to lead to the lack of demand of a bust. And so it was with perps. Almost overnight, it became a semi-distressed market.
Flash forward 25 years to 2011, when the product reared its head again in the Asian offshore dollar bond market. Hoorah! Not, however, if you invested in the things. In an echo of 25 years ago, when I last week asked a Singapore bond trader for a quote on Noble’s 8.5% perp, he made me 84/89. Perhaps the bus wasn’t as wide as it was in 1987, when a 10 point bid/offer spread was the norm, but it is surely wide enough to invoke the ire of any punter who had stepped up to the plate and bought Noble’s perp in primary.
But, just as there were buyers when Noble brought its trade last year, so last week there were buyers for the latest perp from Asia in the form of a deal from Cheung Kong Infrastructure, controlled by Hong Kong’s richest man, Li Ka Shing. As in the great 1980s perp bonanza where risk-on was everywhere like a veritable plague, so CKI’s deal closed – with a little help – in the midst of a similar contemporary contagion.
It now seems that just about everything can find a buyer, be it in the high-beta world of perpetuals, right down the credit curve to high-yield and in the mind boggling world of the bank capital loss absorber. Get written down to zero in the event of the bank’s Tier 1 capital falling below a pre-determined threshold? No thanks.
Assuming headline noise out of Europe doesn’t go deafening again, this is an Asian issuers’ paradise. They have all the trump cards, they know it and they are using them. There was a school of thought across the Asia G3 DCM community last week that the CKI perp would struggle because the 7% coupon was seen as parsimonious when double digits are available in the fast-recovering China property sector.
The deal has a complex equity element and many bankers thought customers would be unwilling to put in the credit work required to take on the paper when they could simply go down the curve and get a 3%-odd pickup for booking a plain vanilla, high-yield name. That ultimately proved incorrect, and rumours that the leads had hard underwritten the deal showed just how much confidence Goldman and JP Morgan had in their invention.
I fully expect there to be a perp issuance bonanza out of Asia. If volatility remains low and if bankers are able to persuade issuers to cough up optically attractive coupons to lure the private bank bid that is driving so much of the current issuance, perps will get done. And if you’re an issuer, ceteris paribus, why wouldn’t you issue a perp over a bullet when refinancing risk is the great anxiety of the moment for Asia’s treasurers?
The problem is that, with the exception (appropriately) of CKI the perps issued out of Asia have underperformed the broader market. So it’s a mystery why investors would seek to own habitually underperforming paper which can’t be hedged against Treasuries and which will gap down to the floor if markets take a turn for the worse.
That is not to say that fast money is about to have a free pop at the next perp. Traders who tried to have a go at Wheelock’s new deal last week got the wrong end of the stick in almost comic fashion. These smart chaps imagined that Wheelock’s pricing 50bp back of its opco subsidiary Wharf would reprice the entire Hong Kong property curve. The shorts managed to push the deal out by 20bp in secondary on the break, only for it to quickly snap back in again by a painful 30bp after a brutal squeeze.
The reality of the primary Asian debt markets right now is that the story isn’t granular at all, but macro. As long as that remains true, anyone trying to parse an individual credit or short a new issue is playing a very dangerous game – even in the murky world of perps.
