Preference shares - perpetual and redeemable

Dear Mr. Tan,
The DBS preference shares are perpetual (i.e. have no expiry date), but are callable (redeemable) by the bank in 2020. Does it mean that DBS will return the capital investment to the investors in 2020?


REPLY
The perpetual nature allows DBS to keep the money forever and to pay the dividend at the specified rate.If DBS is in trouble, they may not pay the dividend (you have to check on this point).If DBS goes bankrupt, you may lose all of the invested sum (but this risk is very small). A preference shareholder has a higher risk that a bond holder but lower risk than DBS sharehholders.

DBS has the option to redeem the preference shares in 2020 and pay back the shareholders. They will do so, if they find that the interest rate is low and they can refinance the preference shares at lower cost. However, if interest rate goes up high, they are likely to keep the preference shares beyond 2020.

The preference shareholder can sell the shares at any time through the stockmarket, at the prevailing market price. The price will increase above par, if the market interest rate has dropped. the price will decrease if the market interest rate increases.

I have asked a financial expert to make a brief analysis and post the details in the FISCA website (www.fisca.sg). It will be available to FISCA members after login.