Complex legal issues of ‘fixed for life’ high-yield security

Road King Infrastructure recently issued the first “fixed for life” senior perpetual security in the high- yield space, which involved several complex legal issues, said the legal counsel involved.

“Senior perpetual securities are instruments that rank as senior in the capital structure, like debt, but are accounted for as equity for accounting purposes,” William Liu, a partner in the Hong Kong office of Linklaters, told China Business Law Journal. “Although they are perpetual securities, like equity shares, and could be outstanding forever, they typically have a coupon [interest rate] step-up after a shorter period of time, with the expectation that the securities will be redeemed by the issuer at that time, similar to the principal of a bond being repaid at maturity.”

In contrast, a “fixed for life” security has a fixed coupon that does not step-up or reset – except in very limited circumstances – which fundamentally alters the way in which investors view and price the security, said Liu. “The expectation is that the security will remain outstanding for a much longer period of time than a typical perpetual security, which raises interesting structuring issues for the issuer and investors.”