What are perpetual bonds?

by Manshu on November 2, 2011

in Articles

Perpetual bonds are bonds that don’t have a maturity date, and to compensate for the fact that investors can never redeem them – they pay a higher rate than other bonds with a similar credit profile.

They are not all that popular and I could not find references of many perpetual bond issues, and there seem to be more dollar denominated perpetual bond issues than rupee denominated ones.

The company that issues the perpetual bonds normally has an option to call them which means that they can decide to redeem the bonds at the end of certain time periods say 5 or 10 years, and the Tata Steel perpetual bond issue had a step up option also which means that if the bond is not called within a certain time frame then the company will have to pay a higher rate of interest on them. They issued the bonds at 11.8%, and if the company didn’t call the bonds within 10 years then the coupon rate would increase by 300 basis points.

They are supposed to be listed on the stock exchange also, but from what I can see there isn’t any trading in them at all. If you know of a perpetual bond that is listed on an exchange then please leave a comment here.

While this may be of interest to pension funds and institutional investors, I don’t see any value in this for retail investors.

I can’t think of a single situation where someone will be better off with one or two extra percentage points in interest income every year with the trade off that they may never see their capital back. That doesn’t appeal to me at all.

These bonds are good for banks and other companies to raise money and shore up their capital and also good for pension funds who would like to lock on to the high interest rates, and if they got the principal redeemed then they anyway need to re-invest it in another instrument, but as far as retail investors are concerned – I don’t see any utility in them.

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{ 14 comments… read them below or add one }

bemoneyaware November 2, 2011 at 11:23 AM

The more I learn the more I realize there is so much too learn. I hadn’t even heard of such bonds. Thanks for sharing

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Manshu November 2, 2011 at 9:14 PM

I’m in the same boat 🙂

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bemoneyaware November 2, 2011 at 11:25 AM

From Wikipedia Wiki :
Perpetual bond are also known as Perp. Perpetual bonds are valued using the formula: y/i where y is an expected yield for maximum term available and i is Annual Coupon Interest on a bond.

Most perpetual bonds issued nowadays are deeply subordinated bonds issued by banks. The bonds are counted as Tier 1 capital, and help the banks fulfil their capital requirements. Most of these bonds are callable, but the first call date is never less than five years from the date of issue—a call protection period.

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bemoneyaware November 2, 2011 at 11:29 AM

Found another one on Economic Times:03 Feb 2011

Quoting it:
The government may convert its perpetual bonds and preference shares in state-run banks into equity, to help the lenders meet the Basel-III norms, a finance ministry official said.

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bemoneyaware November 2, 2011 at 11:32 AM

Hindu business line explains the perpetual bonds beautifully
Perpetual bonds are said to have the characteristics of both equity and debt.

They carry a fixed coupon rate of interest, which is naturally a few notches higher than that on bonds that are redeemable, to compensate for the money permanently locked in.

Of course, its holder can seek an exit through the bourses, as in the case of equity shareholders, where he may make profits or incur losses accordingly, depending on if the prevailing interest rates for similar bonds are lower or higher, vis-à-vis the bond he is holding, among other things.

It has, but accoutrements of equity, in the sense that like equity, it is not redeemable, and hence a permanent source of finance for the issuer, which is why Basle-scarred banks have been lapping up the instrument with alacrity, with manufacturing and companies too getting into the act lately.

The one-sided nature of the instrument would be apparent if one considers the take-it-or-leave-it features written into such bonds by the issuers. Some of the typical features are that the issuer may choose to call the bonds anytime, after say five years; the issuer may choose to convert the bonds into shares and so on, with the holders of the bonds not having the put or indeed any other option.

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Tax Savings November 2, 2011 at 11:18 PM

Provident funds and public sector insurance firms are the other big investors in quasi debt instruments such as perpetual bonds. Any decision by the Government to convert these insutruments into equity will be taken after consultations with other players involved, as it will have long term implications on the retirement savings of millions of salaried Indians. Quite an important topic in relation with personal finance.

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Umesh May 16, 2012 at 1:55 PM

Tata Steel Perpetual Bond are listed in nse

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praveen May 16, 2012 at 5:46 PM

Perpetal bonds are privately placed. They are usually listed in the WDM or the wholesale Debt Market Segmant of BSE? NSE.

Tata perpetual is not available in the retial segment, so you will not get the quotes.

Liquidity is low as institutions hold it mostly. Minimim per bond is typically Rs 10,00,000

I am an investment advisor an offer these to my clients . These bonds are usually available through secondary off market deals.

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Manshu May 17, 2012 at 4:26 AM

Thanks for the info Praveen.

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B. R> Salwan December 22, 2012 at 1:43 PM

Is it safe to buy at Rs. 11.25 Lac for Tata Steel Bond @11.8% interest?

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Rajiv March 26, 2014 at 3:08 PM

Good overview. I discovered these kind of bonds only today. In my view, it does make sense to retail investors who have a large capital and looking to earn regular income. Ofcourse, one can debate the interest rate considering income tax liabilities. However as a concept, it would put in the category of “make money work for you”

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Sanjay patil June 18, 2014 at 6:45 PM

what is the Income tax applicability on interest income or on capital gain in hands of retail investor?

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K P Gopala krishnan July 20, 2015 at 10:48 AM

no one seems to reply on the tax applicability

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K P Gopala krishnan July 20, 2015 at 11:07 AM

Is this tax free is not getting answered anywhere

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