Thursday, 20 June 2019

After the oil shock

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The Singapore dollar bond market has made a cautious start to 2015 after last year’s oil price slump left many investors nursing heavy paper losses on energy-related names.

Workers from Ramky Cleantech Services clean up oil and debris from the beach at East Coast Park just east of the playground at Big Splash Water Park in Singapore.

After the oil shock

Source: REUTERS/Drew Fritz

Workers from Ramky Cleantech Services clean up oil and debris from the beach at East Coast Park just east of the playground at Big Splash Water Park in Singapore.

Risk aversion in global markets spilled over to the Singapore dollar bond market at the start of 2015, pushing investors to the sidelines and crimping new issue volumes. January’s fundraising total of little over S$760m (US$562m), including two Singapore-settled offshore renminbi notes, fell more than 60% short of the S$2.1bn raised in the same month last year.

The slowdown followed a major sell-off in the secondary markets in early December that analysts attributed to the plunge in global oil prices.

“It was a wake-up call for investors used to the bullish markets. However, the good thing is that the market is in a cautious state and not in panic mode,” said a debt capital markets head.

“Still, I think it will be a slow year for the Singapore bond markets, and, being rather pessimistic now, we may just get away with S$15bn–$18bn (US$11.1bn–$13.3bn) in issuance volume for the year, down from around S$23bn last year.”

“It was a wake-up call for investors used to the bullish markets.”

One of the challenges will be reigniting investor demand for fixed-income assets. An investor sentiment index, which Manulife Asset Management and Manulife Singapore released on January 29, shows that bonds are the least popular class in which to invest in the next six months in the city state.

Investor sentiment for fixed-income investments in Singapore sank to 17 in the fourth quarter from 20 in the previous three months. Of those who feel it is a bad time to invest, nearly half or 43% cite volatile markets as their main reason for staying away.

Only 8% of those planning to invest will put more money in bonds, while 21% will focus on equities.

Even so, investors are currently showing extreme risk aversion as a majority have indicated they will keep more funds in cash than any other asset class over the next six months – a strategy that Manulife does not recommend.

“A multi-asset investment solution, comprising a mix of equities and bonds, and diversified exposure to a range of markets, can provide a degree of insulation from market volatility, while also potentially generating returns in excess of cash or even delivering a recurring income stream,” said Jill Smith, senior managing director, Manulife Asset Management Singapore.

The reluctance to invest in bonds reflects the extent of the paper losses that many Singapore investors suffered towards the end of 2014. Oil-and-gas-related issuers account for about a quarter of outstanding Singapore dollar bonds. So when the tumbling oil prices dragged bonds down some 10 points in December, investors wanting an exit found no takers, leaving them sitting on heavy losses.

“A lot of the private-bank clients got burnt. On the other hand, investors with a long-term, take-and-hold view will ride out this period,” said a Singapore-based investor.

The cautious approach has been borne out in recent issues. Gallant Venture priced a S$75m 2.5-year bond on January 26 to yield 7.00%, a figure that raised eyebrows among syndicate bankers. This is not a new issuer, and its deals last year yielded less than 6% for tenors of two and three years. The price reflects investors’ demands for higher premiums in a more volatile market. In spite of the juicy yield, the deal was only just covered.

On the other hand, GuocoLand attracted a book of S$750m for a S$170m dual-tranche offering at the end of January with orders mainly from the private bank community. This is a regular issuer with core assets in properties and a stable cash flow.

GuocoLand managed to achieve pricing near levels it had initially targeted. It had sounded the market earlier for a three-year piece at 3.70%–4.00%, which bankers described as too tight. With price guidance at a higher level and a build-up of book momentum, the issuer managed to price a 2.5-year at 3.6% and a five-year at 4.2%.

Despite the response to GuocoLand, it is far from clear that private bank clients will continue to drive the Singapore dollar market this year. Bankers reckon 2015 will be the year of institutional demand, as the risk-averse mood will force investors to do more thorough due diligence on the credits they buy. This will restrict the market to mainly creditworthy names – high-rated issuers, regular borrowers and those with sound financial metrics.

Banks report that they have a pipeline of deals waiting in the wings, but say finding the right price for both investors and issuers has been a challenge. Potential borrowers have also been shopping around, but find their pricing targets below market expectations. These include Keppel REIT, which has been checking out the markets for the past several weeks for a potential seven-year issue.

“The standoff won’t go away until issuers become realistic at this point in time,” said one debt syndicate banker.

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