Hong Kong's FWD Group, the insurance arm of billionaire Richard Li's Pacific Century Group, raised $250 million through the sale of a perpetual bond on Tuesday, taking advantage of investors' hankering for yield.
The privately held insurer, rated Baa2/BBB by Moody's and Fitch, garnered more than $6.75 billion of demand from 266 accounts, reflecting risk-on sentiment towards these hybrid instruments, which have no fixed maturity date and are treated as equity rather than debt.
"Perpetual bonds are popular because they carry a return of 5% in today's zero-interest-rate conditions," a Singapore-based portfolio manager told FinanceAsia. "The high tolerance for credit risk has helped spur the supply of perpetual bonds."
In a research note, credit rating agency Fitch said it would credit 50% of the perpetual bonds as equity. The perpetual bonds will also receive full equity credit in the capital adequacy assessment to reflect their subordination and perpetual nature, which support balance-sheet loss absorption.
Despite their seemingly indefinite lifespans, investors continued to take position in the secondary market on Wednesday. The perpetual non-call five offering traded up to a cash price of 101.89/101.94 on Wednesday morning, implying a yield of 5.8%.
The lead managers – BNP, HSBC and Standard Chartered – went out with initial price guidance in the 6.875% area, before tightening it to 6.25% - 6.375%. Final pricing of the perpetual bonds was settled at 6.25%.
Perpetual bonds are usually redeemable within five years, and deals are structured to encourage that. In FWD's case, the first call option takes place in January 2022 and a reset every five years at the prevailing five-year US Treasuries plus the initial spread of 440.8bp.
In the event of a change of control, the company agreed to increase its coupon payments by 500bp.
"Rarity value drives demand for FWD's perpetual bonds," a syndicate banker said. "The credit benefits from a group of high-quality shareholders and senior management team."
Zurich-based Swiss Re, the world's second-largest reinsurance provider, invested $425 million for a 12.3 per cent stake in FWD in 2013, valuing the company at more than $3.5 billion at that time.
In 2014, FWD made its first foray into the international bond market, raising $325 million in a ten-year note that pays a coupon of 5%.
According to a research note from a non-syndicate bank, fair value of the deal should be at 6.25%, as it has the benefit of a rating 1-2 notches higher, and a significantly higher reset spread, than Bank of East Asia's outstanding additional tier-1 bond. This should translate into lower extension risk, according to the research.
By investor type, fund mangers took 70% of the new print, private banks 26% and insurers/corporates 4%. By region, Asia and Europe took 83% and 17%, respectively.
