Perpetual bond

Author: Elena Kuzmanovska

On 20th September, 2018 Securities and Exchange Commission in Macedonia Banking Association presented new instrument in the capital market – perpetual bonds.

Тhe Commission recognized perpetual bonds as securities during June, 2018. Perpetual bonds do not have maturity date, therefore they are perpetual i.e “eternal”. These financial instruments can be included in Additional Tier I capital according to Decision on amending the Decision on the methodology for determining the capital adequacy (Official Gazette of the Republic of Macedonia No. 218/16).

In financial world, when talking about perpetual bonds, we consider financial instrument between bond and equity. On one hand, perpetual bonds do not have maturity date (perpetual) i.e they have no maturing principal that should be paid on some fixed date in the future, characteristic in which they resemble to equity. On the other hand, holder of the bond receives the income in form of coupons, in regular monthly instalments in fixed amount and do not have voting rights, characteristics in which they resemble to bonds.

In Macedonia, according to NBRM Decision, they are paid after the instruments that are part of Tier II capital of the bank, in case of bankruptcy or liquidation of the bank. The use of redemption or repayment option is the sole discretion of the issuer, only upon approval of the National Bank. The distribution (interest, coupon) to holders is paid from the distributable items and the bank has full discretion at all time to cancel the distribution for an unlimited period and on a non-cumulative basis and without restrictions to use such cancelled payments of distribution to meet its obligations. They can be written down or to be converted to Common Equity Tier I instrument. Taking into consideration all these characteristics, investment funds are recognized as primary investors.

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