Pushing Maturities to 1,000 Years
Lanchner, David, Global Finance
Banking empires rarely survive longer than a century or two. The Knights Templars, Europe's great medieval banking network, managed to last 286 years. So what was the Luxembourg affiliate of Edmond Safra's Republic National Bank doing last month when it raised $250 million with 1,000year bonds?
Experimenting with what the market would bear. A slew of 100-year issues (by such companies as Disney, IBM, Ford, and Sherwin Williams) have proved successful in recent years, and Republic New York Corporation, the holding company for Republic National Bank of New York, raised $250 million last July with a 100-year bond. Republic wanted to see if even longer maturities were possible. "I made calls to some investment banks and asked how far out we could go. A couple of them said 1,000 years would work," says Stephen Saali, the Republic New York senior vice president who honchoed the deal under chief financial officer Thomas F. Robards.
When it comes to such ultralong maturities, investors don't worry about when they'll get their principal back; they treat the issues as perpetual bonds and recoup their investment in coupon payments over about 14 years. The real point is that many life insurers and managers of pension funds for young workforces are heavily overweight in shortmaturity mortgage and junk bonds and underweight in long maturities that best match their liabilities. Acquiring a batch of ultralong bonds stretches out the average maturity of their portfolios. An added allure is that the bonds provide more capital gains in a bull market. The longer the maturity, the more a bond's principal will rise when interest rates fall. The degree to which a bond will outperform a benchmark (such as 30year US treasuries) is called "positive convexity"-and 1,000-year bonds have a lot of positive convexity. …