Can REITs use perpetual bonds to outsmart leverage rules?

Yes, but there’s a caveat.

Following a report which claimed that Singapore landlords are loading up on bonds masked as equity to get around new borrowing limits, the Monetary Authority of Singapore has clarified that perpetual bonds can indeed be treated as equity for the purpose of leverage rules.

However, such securities need to have the characteristics of a permanent form of capital, the MAS said.

“The characteristics that must be met include (a) the securities have a perpetual term; (b) the securities are deeply subordinated; (c) dividends or distributions are entirely at the discretion of the REIT and are non-cumulative; and (d) there are no terms that would incentivise the REIT to redeem early,” MAS said in a statement.

“Securities that do not meet such criteria are subject to the REIT leverage rules. Conversely, the treatment of securities that have the characteristics of permanent capital as equity would not amount to a circumvention of the leverage rules,” MAS said.