SEC moves for rating on perpetual issuers

SEC moves for rating on perpetual issuers

High-risk bond attractive but risky

The Securities and Exchange Commission (SEC) is preparing to require perpetual bond issuers to acquire a credit rating to protect retail and high net worth investors from risk.

Perpetual bonds or subordinated bonds are a type of high-risk bond that can be redeemed upon the company's dissolution, or be repaid after a very long time, said Ariya Tiranaprakit, senior executive vice-president of the Thai Bond Market Association (TBMA).

She said this variety is riskier and more complex than conventional bonds and provides higher interest rates to attract investment.

The properties of this bond are similar to those of capital and results in accounting rights in the first five years, where the amount of debentures issued and offered will be combined with the capital.

This does not affect the debt-to-equity (D/E) ratio of the issuing company, which increases liquidity for debt structure management.

The companies that previously issued these types of bonds were large firms that needed funds to expand business and control D/E to have room to borrow from a bank.

TBMA found there was 119 billion baht in perpetual bond issuances from 2012 to June 30, 2020, while the majority of investors in the bonds were retail (up to 80%) and high net worth investors (6%).

SEC deputy secretary-general Sirivipa Supantanet said the commission is concerned as demand for perpetual bond issuances has increased, mostly focused on selling to retail and high net worth investors.

To protect investors from risk, the SEC is considering requiring perpetual bond issuers to acquire a credit rating for the bond, which must be above the investment-grade level.

Investment-grade bonds have minimal risk to investors and are rated BBB- to AAA.

"We are concerned as retail and high net worth investors should have a better gauge of the investment risk in perpetual bonds. They should not decide to invest based only on an attractive return," Mrs Sirivipa said.

She said the deposit interest rate has remained low for a very long period, so investors will search for yield and investments in perpetual bonds because of the higher rate.

The SEC believes a credit rating would be an indicator for investors to consider in determining the risk of perpetual bonds, said Mrs Sirivipa.

"There is a possible risk in not receiving interest and principal, so the performance of the company must be monitored regularly," she said.

The SEC is holding a public hearing with market participants to see if they support the proposal and plans to announce an effective date later, said Mrs Sirivipa.

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