Perpetual Bonds:
Indian Renewable Energy Development Agency Ltd (IREDA) recently said it has raised ₹453 crore at 7.70% per annum through its second issue of Perpetual Bonds, a step that strengthens its capital base for financing green energy projects.
- It is a fixed-income security that has no maturity date and theoretically pays interest forever.
- The perpetual bond means the issuer is under no obligation to redeem the principal amount at any point.
- Also known as “perps” or “consol bonds,” these instruments represent a permanent source of capital for the issuer.
- It represents one of the purest forms of debt that closely resembles equity in certain aspects.
- With these bonds, investors do not receive the principal amount back unless the issuer opts to call the bond.
- This action involves returning the principal and discontinuing interest payments to bondholders.
- This call feature provides issuers with the flexibility to refinance if market conditions become favourable.
- Most modern perpetual bonds include call provisions that allow issuers to redeem them after a specified period, typically 5 to 10 years from issuance.
- To compensate for the indefinite tenure and higher risk, perpetual bonds generally offer higher interest rates.
- If the issuer goes bankrupt, perpetual bondholders get paid after other creditors but before shareholders, placing them in a middle priority tier.
- Perpetual bonds are highly sensitive to changes in interest rates, which can cause significant fluctuations in their market price.
- In India, banks are the primary entities that issue perpetual bonds to meet their capital requirements.
- Even though perpetual bonds do not provide principal repayment to investors, they can be an attractive investment option for individuals aiming to generate a stable income for a long period of time.
- From an accounting perspective, perpetual bonds often receive equity-like treatment on balance sheets, making them attractive for organisations looking to strengthen their capital structure without diluting existing shareholders’ ownership.
