Quantcast
Latest Stories

Corporate Securities Info

Deceptive securities label



Scriptwriters and finance experts share a common trait: They are imaginative in the choice of titles and plots for their crafts.

Depending on the needs of their clients, investment advisers have devised financing schemes that go by such names as long-term commercial papers, collateralized debt obligation, convertible stocks and global depositary receipts.

Like commercial advertisements, these labels are aimed at attracting the attention of potential investors and, with the right pitch, encourage them to entrust their money to issuers or underwriters of securities or financial instruments.

The road shows or promotional activities undertaken to ramp up interest on these issuances are no different from those done by advertising companies when they vie for the accounts of big ticket clients.

Good features are highlighted, sometimes to the point of exaggeration. Handicaps are played down or given a spin that make them look like blessings in disguise instead.

The idea is to put their best foot forward and pray that the prospective client will buy their line.

Stiff competition in the industry has forced some investment companies to take a similar approach in the promotion of their products to the disadvantage of small (or retail) investors, or those who do not have the expertise and resources of hedge funds, pension plans and other big league investment groups.

Features

In recent years, securities described as “perpetual bonds or stocks” have been floated or offered to the public by some companies to meet their expansion requirements or to pay debts earlier incurred for corporate purposes.

For the layman, perpetual means forever or without any time limit. Not so for business people who have given it a different meaning when used to describe bonds or securities.

Perpetual bonds are fixed income instruments (or corporate debt obligations) that do not have maturity dates. They pay their holders a high fixed interest rate up to a specific date but the return of the principal is not guaranteed. It may or may not be paid back depending on the terms of the offer.

Perpetual stocks (often in the form of preferred shares) have similar features. They pay a fixed dividend rate and are non-voting, non-convertible to common stocks and non-participating, i.e., their holders have no share in the corporation’s assets in case of liquidation.

Contrary to their common sense meaning, these instruments are hardly perpetual or, at best, coterminous with the corporate life of their issuers.

They can be redeemed or bought back by their issuers, at their sole option, after, say, five years in the case of bonds and three years for stocks, from the date of their issuance.

To make the offering more attractive, the issuers promise to “step up” or increase the interest or dividend rate by a certain percentage if they are not redeemed on their indicated redemption dates.

Discretion

The holders of these bonds or stocks have absolutely no say on the productive life of the instruments they own. All the cards are stacked in favor of the issuer on when the interest or dividends shall continue to be paid or when the principal will be repaid.

In investment jargon, these securities are “callable,” or subject to termination at the discretion of their issuers.

Thus, if, for example, the issuer thinks it can secure fresh money from the market by selling new bonds at interest rates lower than those given to the bonds earlier issued, it may opt to redeem the latter ahead of its maturity period and, in the process, save on interest payments.

A similar action may be taken for perpetual shares if the company has surplus profits that allow it to buyback those shares (whose proceeds may have enabled it to rake in additional revenue) and, as a result, forgo further dividend payments.

For high-flying investment groups, the hefty interest rates that accompany perpetual bonds make good business sense. The payoff becomes higher if the principal is also repaid. And even if it is not, their profits from other investments could make up for the difference.

But not for small investors. If the bond is called and their principal returned, they have to content themselves with reinvesting their money in bonds that offer lower rates.

Dividends

In the case of perpetual shares, while the diminution of dividend payments in case the stocks are called would not adversely affect the bottom line of professional investors, the same cannot be said of small investors.

Most retail investors put their money in these stocks in the expectation that they will enjoy dividend payments from the time they fall due until the stocks remain in their hands.

The dividends are looked at as “pension funds” that can pay for or supplement the holders’ daily financial needs. If the shares are redeemed and the dividend payments cut short, finding another venue for investment that offers similar benefits would not be easy.

In the first place, there are not that many companies that offer securities to small investors that provide healthy dividend rates. And if there are, the offerings are far and in between. Such offerings are made only when the need arises or the market conditions favor taking that action.

So what’s in a name? A lot and more, especially if it is attached to something that can result in adverse financial consequences to people who can be misled by it.

Word of advice to potential investors in financial instruments: Examine carefully their terms and conditions before letting go of your money. If in doubt, consult a knowledgeable friend.

For comments, send your e-mail to rpalabrica@inquirer.com.ph.


Follow Us


Follow us on Facebook Follow on Twitter Follow on Twitter


Recent Stories:

Complete stories on our Digital Edition newsstand for tablets, netbooks and mobile phones; 14-issue free trial. About to step out? Get breaking alerts on your mobile.phone. Text ON INQ BREAKING to 4467, for Globe, Smart and Sun subscribers in the Philippines.

Tags: Bonds and t-bills , Personal finance , Securities , stocks

  • http://profile.yahoo.com/SBOKR3M2ZOJK4N45O4ONN3G63A Trilogy

    it’s less “deceptive” and more “specialized jargon”. Of course perpetual bonds don’t assume to return your principal otherwise it would have a maturity date and it wouldnt be perpetual. Reinvestment risk applies for everyone.



Copyright © 2014, .
To subscribe to the Philippine Daily Inquirer newspaper in the Philippines, call +63 2 896-6000 for Metro Manila and Metro Cebu or email your subscription request here.
Factual errors? Contact the Philippine Daily Inquirer's day desk. Believe this article violates journalistic ethics? Contact the Inquirer's Reader's Advocate. Or write The Readers' Advocate:
c/o Philippine Daily Inquirer Chino Roces Avenue corner Yague and Mascardo Streets, Makati City, Metro Manila, Philippines Or fax nos. +63 2 8974793 to 94
Advertisement
Advertisement

News

  • Enrile chief aide back in PH ‘to face charges’–report
  • Pakistan library named ‘bin Laden,’ as memory fades
  • US teacher fired over comment on black president
  • Magnitude-7.5 earthquake shakes Mexican capital
  • Title of new Hillary Clinton book: ‘Hard Choices’
  • Sports

  • Motivated LeBron James preps for postseason
  • Nadal ousted by Ferrer in Monte Carlo quarters
  • Pacquiao shorts in Bradley fight sold for P1.7M in LA auction
  • Ryu pitches Dodgers past Giants
  • Alonso sets the pace in Chinese GP practice
  • Lifestyle

  • Levine designs womenswear with help from fiancee
  • Gabriel Garcia Marquez, Nobel laureate, dies at 87
  • Ford Mustang turns 50 atop Empire State Building
  • Pro visual artists, lensmen to judge Pagcor’s photo contest
  • ‘Labahita a la bacalao’
  • Entertainment

  • Myx TV premieres Asian American ‘docu-series’
  • A nutty finale for ‘Scandal,’ TV’s craziest show
  • EXO postpones release of mini album ‘Overdose’
  • ‘X-men’ filmmaker slams ‘fabricated’ sex attack claims
  • Singer Chris Brown’s bodyguard on trial in DC
  • Business

  • US commerce secretary spells out economic facet of ‘pivot to Asia’
  • Italy sells luxury state cars on eBay
  • Asian shares mostly up in quiet trade
  • Dollar up in Asia on US jobs data, Ukraine deal
  • Barbie doll has a problem
  • Technology

  • Nasa’s moon-orbiting robot crashes down
  • Netizens pay respects to Gabriel Garcia Marquez
  • Nokia recalls 30,000 chargers for Lumia 2520 tablet
  • Facebook rolls out ‘nearby friends’ feature
  • Netizens seethe over Aquino’s ‘sacrifice’ message
  • Opinion

  • Editorial cartoon, April 17, 2014
  • A humbler Church
  • Deepest darkness
  • ‘Agnihotra’ for Earth’s health
  • It’s the Holy Week, time to think of others
  • Global Nation

  • Multicultural flock marks Good Friday in San Francisco
  • Las Vegas ‘Pinoy Pride’ fest hails Filipino heritage
  • Marking Jesus’ journey on Good Friday
  • Filipina accomplice arrested for fake bills in Malaysia
  • DoH denies Filipino nurse no longer positive for MERS virus
  • Marketplace