Insurers keeping away from perpetual bonds

Insurance companies also say that as the instruments are a mix of debt and equity, they are not comfortable investing in them

Insurers are staying away from tier-1 perpetual bonds issued by banks because of the lack of liquidity in the instrument and pricing issues in it.

Insurance companies also say as the instruments are a mix of debt and equity, they are not comfortable investing in these.

A perpetual bond is a financial instrument with no maturity date. These bonds are not redeemable but pay a steady stream of interest forever. Here, the price of a perpetual bond is, therefore, the fixed interest payment, coupon amount, divided by a constant discount rate, which represents the speed at which money loses value over time (partly because of inflation).

The head of fixed income at a life insurance company said there have been some issuances of these Basel III-compliant bonds but they’d stayed away.  “Because they are bank bonds, there have been some demands from provident funds. So, they are priced much lower than what we want it to be,” he said.

In the recent past, only a handful of life insurance companies are said to have invested in these. Sector experts said only top life insurers have the investable asset size and spread to take a risk on this instrument.

WHAT IS A PERPETUAL BOND?

->Perpetual bond is a financial instrument with no maturity date

->These bonds are not redeemable but pay a steady stream of interest forever

->These bonds come with tough covenants (rules) for distributing the dividends

->These bonds are not finding any takers as they are quasi-equity; has features of both equity, debt

->Lack of liquidity, lower pricing dissuade investors, especially insurers

“In perpetual bonds, there is not much of liquidity in the market. In the past, we have invested in these. However, as an insurance market player, we prefer bonds with secondary market liquidity,” said Nirakar Pradhan, chief investment officer, Future Generali India Life Insurance.

Insurers also await clarity on whether this instrument would count as a debt or an equity instrument from the sector regulator. The regulator has allowed companies to invest in these bonds.

Sector executives and arrangers had earlier said that the task of hawking these instruments could be challenging in FY16, as investors have ample options. These bonds come with tough covenants (rules) for distributing the dividends, which investors often find unattractive. These bonds are referred to as additional tier-I capital under the Basel-III requirements of banks.

Yields apart, the fact that this instrument would be quasi equity is also keeping large insurance investors away. The chief investment officer of a mid-size insurance company said they’d prefer to invest in pure debt, as in the case of Basel-III bonds an entity not making profits need not pay interest.

In fact, some banks are planning to tap the equity route rather than issue these. “We can raise capital through tier-I perpetual bonds but we will see, as our credit rating is currently low, due to which we might not get much investor attention. If our rating improves, maybe we’d look at it. Raising funds through equity seems a better option for us than these bonds,” said a senior official of a public sector bank.

Curated From  :  Insurers keeping away from perpetual bonds

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