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Fixed outgoings: Negative coupons exist, but anomaly not new norm
2016年3月9日 / 下午3点36分 / 2 年前

Fixed outgoings: Negative coupons exist, but anomaly not new norm

* Floating-rate bonds carry theoretical negative coupons

* But Coca-Cola and others set barriers at zero

* Exceptions in France and Japan, more may follow

By John Geddie

LONDON, March 9 (Reuters) - Imagine buying a bond from Coca-Cola only to find that interest rates had fallen so far below zero that rather than receive the quarterly coupon payment, the multi-billion dollar global business said you owed it.

In the topsy-turvy world of negative rates that scenario could have become a reality if the drinks company had not taken the precaution of setting a floor on the coupon of a 2 billion euro floating-rate note (FRN) sold last year.

Coca-Cola’s sidestep shows that however far central banks cut interest rates, it remains impractical and legally contentious for firms to collect negative coupons on bonds, leaving an effective barrier at zero.

“The floor was a direct request from the investors, and was included in the deal structure to ensure strong demand,” said Kerry Tressler, a spokesperson for the firm.

Investors still pay for the privilege of lending to some top-rated governments and firms through bonds with negative yields to maturity. Although they can carry a small coupon, such bonds are sold at a cash price higher than what will be redeemed, baking in a lower overall return than the face value investment.

Japan followed Switzerland in selling a 10-year bond with negative yields last week.

Buyers of a bond with a negative yield can profit if rates fall further, the bond appreciates and they can sell on before maturity. But bonds with a negative coupon, in theory, would seek a payment to the borrower from the lender each quarter.

The existence of such bonds in Europe’s FRN market, which is just a fraction of overall debt outstanding, is an anomaly created by central banks catching investors off guard.

While Sweden flirted with negative rates in 2009, few could have predicted that it would become normal in the years ahead.

After cutting its deposit rate to -0.20 percent in 2014, the European Central Bank signalled it would stop, only to resume cuts a year later. Financial markets now expect rates as low as -0.50 percent by year end.

Cuts to official rates force down interbank lending rates, the benchmark for coupons on many floating-rate transactions.

In the case of Coca-Cola’s bond issued in 2015, the coupon pays 0.15 percent over three-month Euribor. With three-month Euribor trading at around -0.22 percent that equates to -0.07 percent. But the coupon payment due on June 9 was set on Wednesday at zero, the first time the floor has been triggered on the bond.

PRACTICAL PROBLEMS

Data from IFR shows a range of issuers including cities, banks and companies have bonds with theoretical negative coupons.

These are unlikely to ever be imposed, though, as market infrastructure is not set up to collect coupon payments from multiple investors to an issuer.

Europe’s main clearing houses, Euroclear and Clearstream, which settle bond deals in the region, have said they will not accept any debt which has a fixed negative interest rate.

On floating rate notes, they said negative coupons have usually paid zero because the issuer set a floor, chose not to collect due to the burden, or the bond terms did not allow for a payment to be made.

Matthew Hartley, a capital markets partner at lawyers Allen & Overy, said bond terms would not normally allow cash to flow from investors to an issuer.

“It is very difficult to enforce against what is in theory an anonymous mass of bondholders,” Hartley said.

This has still created uncertainty among investors though. Allen & Overy said it has helped more issuers insert explicit terms in bond documents flooring coupon rates at zero in recent years.

STRANGE EXCEPTIONS

There are some examples where negative coupons were paid.

Euroclear said it has on a few occasions collected coupon payments due from investors to issuers on short-term French commercial paper known as titres de creances negociables (TCNs). This paper is usually only held by a couple of investors so payments are easier to collect.

Going back 14 years, Warren Buffett’s Berkshire Hathaway issued a bond with an effective negative coupon in 2002. This was sold with a warrant to buy Berkshire shares, the net effect of which was investors paid more in interest than they received.

While bonds with negative coupons will never become mainstream, investors are not ruling out the possibility of other peculiar structures as official rates go even lower.

Ryan Myerberg, a portfolio manager at Janus Capital, pointed to Japan, where an investment company used a swap to lock in a negative interest rate on a series of loans -- thought to be the first deal of its kind.

Loans to GLP Real Estate Investment Trust agreed in January by Mizuho, Citi and the Bank of Fukuoka carry an annual interest rate of -0.009 percent, according to the firm’s website.

“I have learned over the past years that anything is possible in these markets,” Myerberg said. (Additional reporting by Jon Penner at IFR; Editing by Catherine Evans)

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