A long waited answer with respect to the matter of perpetual bonds whether it is considered as a capital item or liabilities item on a company’s bookkeeping practices has come out recently. Tentatively financial authorities along with KASB (Korea Accounting Standards Board) came to the conclusion that those who intend to issue perpetual bonds should be able to put its entry as a capital item rather than liabilities as a debt. This issue had been highly controversial in the wake of the event that a company successfully issued this bond for the first time in Korea. Since perpetual bond has similar terms and conditions with other generic bonds, which paying periodical interest payment at the amount of principal, opponents argue that perpetual bond should be considered as liabilities. However, the bond has no maturity date unless the issuer requests its buyback; which differentiate itself from other generic bonds. Upon the decision, companies who are on the verge of financial trouble should be able to raise its capital easier without increasing debt burden. Also public companies expect to leverage this product in terms of capital refreshment to prevent from budget trouble in advance.
Perpetual bond is a kind of bonds that the issuer should be able to extend its maturity date in virtually permanent basis. Since it has no maturity commitment, only interest payment shall be paid to investors. However, the issuer is entitled to request a call option for buy-back after the certain period of time because the interest payment expect to be higher after the pre-arranged time period in terms of bond structure.(ex. incremental interest rate should be added after every 2~3 years respectively). Otherwise, the structure of bond is closely similar to generic bonds.
With no maturity date (extend up to 30 years) and standing on the last imbursement schedule on bonds liabilities, the perpetual bond may be considered as a capital item. However, bond purchasers, investors do have a put option right and the company should offer stock transfer right as a mortgage for a security purpose. On that note, opponents argue that perpetual bond has a propensity to be liabilities, not capital.
At present, the perpetual bond shall be treated as a capital item tentatively and further measurement in detail expects to be decided sooner or later. Notwithstanding, it gives a boost for companies as well as bond market as whole. The company should be able to infuse new capital without a burden and also depressed bond markets expect to be revitalized once more companies rush to issue. Additionally debt-ridden public companies might take advantage of perpetual bond in term of capital replenishment. It is well known fact that most of public companies are running a deficit for years. If it is allowed to do so, public companies should be able to enhance their financial condition without heavily depending on national subsidies.
Jin Mok Kim