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Asian investors and Latin perps issuers get back into bed

The “marriage made in heaven” (as it has been described in the financial press) between yield-hungry Asian investors and perpetual bond-issuing Latin American companies turned hellish in May 2006.

The increase in US treasury rates suddenly made bonds that matured at the issuer’s discretion an extremely unattractive prospect, and the enthusiasm that retail and institutional investors across Asia had shown for the slew of perps that followed Pemex’s pioneering $1.75 billion deal in 2004 quickly vanished. Now there are tentative signs that a reconciliation might be at hand.

There was a rush of perpetual bond issuance at the end of 2006: perps have always been attractive products for issuers, which pay only a small premium on the price of a regular bond for the insurance of being able to decide whether or not to call the bond after a set date (usually five or 10 years). The trick has been to convince investors seeking the higher yields on offer to overlook or accept the risk that they might be left holding below-par paper when markets tumble. When bond markets are good, as they were until the Fed’s mid-2006 rate increases, this can be done; when they start to slide, the volatile perp market plummets faster than most.

Past forgotten

Now markets have recovered somewhat, cash-rich Asian retail investors are looking to invest and Latin American corporates seem to be hoping that past difficulties will be forgotten and new offers of perpetual bonds welcomed with open arms.

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