Quote:
Originally Posted by Unregistered
Bank perps work a little differently from what 38yrold described. Banks don't typically issue senior debt because they can always take in cheap deposits. However, they have to maintain a Basle capital adequacy ratio and two hybrid instruments qualify for capital - sub debt and perps. Perps have a higher yield than any debt because they rank lower if a company fails and are perpetual i.e., you may never see your money back. However, in the case of bank perps, the Basle rules are such that they stop qualifying for capital after a period of time, like 5-10 yrs, which is why banks typically redeem them and investors expect banks to redeem them. There is also typically a interest step-up clause to convince investors that their money won't be tied up forever. However, if the bank is in trouble, it can choose to take the higher interest rate and not redeem.
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Yeah, thanks for your post. That is also my understanding of how perps work for the banks too. However, under Basle III, the old perp structures as we know it would not qualify as Tier I capital anymore. Thus, I am attracted to pick up some of the old structures, with short durations before they disappear from the market. The new ones (called BCCS or something similar) are much more equity-like and less bond-like. They are quite different animals. Some are already in the market. Not good for investors unless they pay substantially higher yields for the risks the investors are taking.
That is why I specifically chose the earlier perps issued by
(1) investment grade Asian banks;
(2) which generally have higher loan-to-deposit ratios ("LDRs"); and
(3) which are also systemically important institutions in their own countries.
In any case, the Asian banks are generally not so adventurous in terms of their trading books so the main issue you have to look out for in assessing an Asian bank's risk is mainly the credit risk of its loan portfolio, regulatory risks of their home regulators and liquidity risks (alleviated by their low LDRs).
What I am most afraid of and can't really analyse is the timing and speed of interest rate hikes. I have read various research and economic forecasts and you know what they are worth right? Logical arguments aside, at the end of the day, there are always qualifiers to those forecasts. But, a punt on short and mid term rates not rising more than 4% within a 2-3 year duration seems fairly safe to me at the moment. Hence, in my view, such a short duration, investment grade rated portfolio should be safe enough for a buy-and-hold strategy to generate a 8%+ return on capital. Everyone knows and expects interest rates to rise, the issue is when and how sharp. Since no one can tell, we will need to have a strategy to protect or at least mitigate such risks when it happens and that is why I chose investment grade banks (generally credit spread would rise less compared to high yield names) and deliberately kept the duration short.
Also, I am not aware of any banks not redeeming their perps at their respective call dates. I must confess that I don't follow the perps market closely and hence may have missed out on some which may not have called in the past, so I asked the bankers and they said they were also unaware of any who have not redeemed thus far. The key issue to me hinges on issuers redeeming their perps at their call dates because all you need is one joker who doesn't call and the rest of the perps would fall in a knee jerk reaction. The other factor supporting this is that banks have a reputation to protect and they will need to make the call when due because if they do not make the call, it signals that the banks are in some sort of trouble. For an institution that runs their business premised upon reputational risks and consumer confidence, that is the last thing they would want to signal.
Hence, the more I think about it, the more inclined I am to plunge into it. Based on my current circumstances, I will still be very much overweight cash even after I invest into this. Furthermore, I probably won't have the guts to invest 100% of my investable cash into equities should a correction happen.