The fixed income market has been characterized in recent months as highly illiquid, suffering from tightening spreads and fluctuating due to data and comments coming from the U.S. Fed. Under this cloud of volatility, a glimmer of light can be seen from the new issues that have fed into the primary market, which have stimulated secondary market flows. The most active countries in LatAm have been Chile, Brazil and Argentina, and the types of issues that have attracted the most attention are the perpetual issues of Banco Estado and Banco BCI.

Perpetual bonds are instruments that do not have a specific maturity date. They are distinguished by having a "call", a date after which the issuer has the option to repurchase the bond, and if it does not do so, the rate will become variable according to the conditions stipulated in the prospectus. The main characteristic of perpetual bonds is that they are convertible into shares. According to Chilean regulations, the conversion is triggered when the CET1 (Common Equity Tier 1) falls below 5.125%.

The banks' current data are well above that number. At the end of 2023, the CET1 ratios for BCI, Banco Estado, Banco de Chile and Banco Santander were 11.08%, 9.67%, 13.7% and 11.12%, respectively.

The new issues mentioned are BCICI 8.75 PERP (BB+) and BANCO 7.95 PERP (BBB-). Although the BCI issue is High Yield, both Banco BCI and Banco Estado are Investment Grade issuers, and the perpetual status of these issues makes the bonds trade at relatively high rates compared to their peers. In the current market, a BB+ rated bond, with a similar duration, trades in the 7.0-7.5% zone vs. 7.82% for BCI, while a BBB- rated bond trades in the 6.5-7.0% zone vs. 7.47% for Banco Estado. Considering the rate and risk of the bond, these perpetual bonds are better positioned compared to other similarly rated bonds.

Considering the market context and the risk level of the issuers, this class of bonds is in high demand, driving their prices to above par levels. It is worth giving them a second look when making investment decisions. And it is likely that other banks with similar characteristics will repeat the recipe of BCI and Banco Estado. In a market where finding yields is becoming increasingly challenging, perpetual bonds may offer an alternative, perpetual bonds may offer an attractive alternative for investors.

Cristián Zañartu
International Fixed Income Analyst Fynsa Money Desk