In the tradable fixed interest market there are a number of different types of securities, from senior bonds with a fixed coupon (interest rate) and maturity date,through to perpetual preference shares with resettable coupons and no maturity date. Some of the key points to note about the various types of tradable fixedincome securities available are:
Senior Bonds – These bonds can be either secured or unsecured. They rank ahead of subordinated debt holders and shareholders. Senior debt for large corporations is typically given a credit rating by a global credit rating agency. Typically these bonds have a fixed maturity date and fixed coupon. On maturity the principal is redeemed to the holder in cash. High quality corporate bonds are easily traded in the secondary market without undue premiums added for risk or liquidity.
Subordinated Bond – These bonds rank below senior debt and all other debt but before shareholders and unsecured creditors for repayment in the event of liquidation. There are also a large number of Subordinated Callable Bonds on issue by banks in the New Zealand market. These have tended to be 10 year bonds callable after five years meaning that the initial coupon is fixed for the first five years and if the bonds are not called (ie redeemed for cash) at the end of the first five years then the coupon will be reset at either a new fixed or floating rate for a further five years and then they are repaid in full.
Capital Note – Fixed rate unsecured notes are subordinated to all other debt obligations of the issuer. Rather than a maturity date, capital notes have an "election date" at which time the note holder may elect to invest for a further period on new terms and conditions or convert the notes into ordinary shares of the issuer. In any event the issuer retains the right to pay note holders in cash on the election date.
Capital Bond – Subordinated to all other debt obligations of the issuer. Typically these have a maturity date but may be exchanged, repaid or resold earlier in certain circumstances. They also tend to have a reset date at which time certain terms can be adjusted. On set election dates, holders can elect to retain the bonds at the new terms or request the company sell their bonds at the issue price on the election date, using a resale facility established by the company for that purpose. If the company is unable to sell the bonds the holder can elect to have the bonds converted to shares.
Perpetual Bond and Perpetual Preference Shares – As a perpetual issue the securities do not have a maturity date which means the only exit option for a holder is to sell on market. The primary difference between perpetual bonds and perpetual preference shares is that the bonds pay interest and the shares pay a dividend, which is usually fully imputed. Perpetual issues are typically unsecured and subordinated ranking behind all other creditors. The coupon paid by the security is reset periodically at a margin over the prevailing swap rate with the issuer also having the ability to call (redeem) the security.
