Perpetual subordinated debt

Subordinated debt

In finance, subordinated debt is debt which ranks after other debts should a company fall into receivership or bankruptcy....

is debt (bonds) with no maturity date for the return of principal, never needs to be redeemed by the issuer, and thus pay coupon interest continually until bought back (hence, "perpetual"). Like other subordinated debt, it has claims after senior debt (hence "subordinated") in the event of default.

Perpetual subordinated debt is not "straight debt", rather it is close to, or in some cases identical to, preferred shares

Preferred stock

Preferred stock, also called preferred shares, preference shares, or simply preferreds, is a special equity security that has properties of both an equity and a debt instrument and is generally considered a hybrid instrument...

, paying a fixed-rate coupon similar to preferred shares' fixed-rate dividend. Perpetual debt comes in two types: cumulative and noncumulative. Interest on cumulative perpetual debt accrues if payments are missed. For noncumulative perpetual debt, if payments are missed, they do not accrue and the cash flow

Cash flow

Cash flow is the movement of money into or out of a business, project, or financial product. It is usually measured during a specified, finite period of time. Measurement of cash flow can be used for calculating other parameters that give information on a company's value and situation.Cash flow...

 is lost.

Noncumulative perpetual debt is almost identical to typical preferred shares (most of which are noncumulative), the only difference being that preferred shares often have the option of conversion to common shares

Common stock

Common stock is a form of corporate equity ownership, a type of security. It is called "common" to distinguish it from preferred stock. In the event of bankruptcy, common stock investors receive their funds after preferred stock holders, bondholders, creditors, etc...

, while perpetual debt generally does not. Because noncumulative perpetual debt can be counted as Tier 2 capital

Tier 2 capital

Tier 2 capital, or supplementary capital, include a number of important and legitimate constituents of a bank's capital base . These forms of banking capital were largely standardized in the Basel I accord, issued by the Basel Committee on Banking Supervision and left untouched by the Basel II accord...

 (supplementary capital), it is generally issued by banks as a way to maintain capital requirement

Capital requirement

Capital requirement refers to -The standardized requirements in place for banks and other depository institutions, which determines how much capital is required to be held for a certain level of assets through regulatory agencies such as the Bank for International Settlements, Federal Deposit...

s (i.e. capital adequacy ratio

Capital adequacy ratio

Capital adequacy ratio , also called Capital to Risk Assets Ratio , is a ratio of a bank's capital to its risk...

or CAR). The debt is generally callable by the issuer at some point.
Dictionary of Finance and Investment Terms, by John Downes and Jordan Elliot Goodman, published by Barron's