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Tuesday, 18 June 2019

Calculated risks

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  • A performer from the Jiangxi Acrobatic Troupe balances a set of glasses on her nose during a Chinese New Year show in Singapore.

Singapore dollar debt issuers are luring yield-starved investors with the promise of juicier returns from riskier structures, but high-yield remains a no-go area.

The chase for yield in an environment of low interest rates has brought the Singapore dollar debt market back to life, but the main beneficiaries have been quality issuers as local investors are still smarting from their losses on high-yield paper.

The year began on a sombre note with steep falls in world markets triggered by worries about slowing Chinese economic growth and collapsing oil prices. The risk-off sentiment was exacerbated by fears of early rate increases in the US. Adding to global woes from the perspective of Singapore investors, Indonesian mobile phones retailer Trikomsel and fisheries group Pacific Andes Resources were knee-deep in debt restructuring talks after defaulting on Singapore dollar bonds.

Once prospects of US Fed rate action faded, markets began to rally and investors found themselves under-invested and under-allocated. Issuers also saw their chance to lock in cheap funding and bond issuance in the period to July 15 jumped 14.5% from a year earlier to S$13.4bn (US$9.9bn).

“Our primary bond activity will stay active in the coming months, as issuers take advantage of low rates to meet their financing needs. The Singapore dollar market has ample liquidity still.”

“Our primary bond activity will stay active in the coming months, as issuers take advantage of low rates to meet their financing needs,” said Tan Kee Phong, OCBC Bank’s head of capital markets. “The Singapore dollar market has ample liquidity still, with demand from investors searching for good assets in this low-interest-rate environment. The supply needs to catch up, and the conditions of low rates, benign inflation and market demand would spur supply.”

The global spread of negative yields has created an opportunity for high-grade issuers to sell more risky structures. This will support more sales of perpetual securities and subordinated bank capital, both of which dominated in the month of May, raising almost S$4bn.

A handful of foreign financial institutions have been considering the issue of subordinated capital in Singapore since January, but the window opened fully in May and more are expected to tap the market in the coming months.

Four Basel III-compliant Tier 2 offerings and one Additional Tier 1 issue priced in the space of just two weeks in May. Societe Generale and United Overseas Bank snapped much of the demand by going first with their S$425m 4.3% Tier 2 and S$750m 4.0% AT1, which drew a combined order book of S$3.7bn.

They were followed by National Australia Bank’s S$450m 4.15% T2, Manulife Financial Group’s S$500m 3.85% T2 and BPCE’s S$130m 4.5% T2.

The banks timed their offerings perfectly as real money accounts were crying out for diversification after a series of tightly priced deals sold in earlier weeks by Singapore-listed REITS and investment-grade names.

The transactions also highlighted a change in the investor base for such deals. Whereas private bank clients were the main buyers in the past, institutional investors came in with robust demand this time around.

Perpetual love affair

Perpetual bonds have been another trend this year. AusNet introduced a new structure in the form of a dated hybrid in February and was soon joined by other Singapore companies, including Hyflux, Perennial Real Estate, Mapletree Logistics and Frasers Hospitality Trust to tap favourable demand for perpetual notes.

Retail investors have also been on the prowl for higher returns and have responded enthusiastically to the government’s moves to democratise investments in listed bond issues. In May, the Singapore Exchange introduced a “seasoning framework” that will allow individual investors to buy bonds originally sold to institutional and accredited investors.

Faced with negligible bank deposit rates, local savers piled into offerings from Perennial RE, which sold a S$280m 4.55% four-year retail bond and Aspial Corporation, which sold a S$200m 5.3% four-year retail bond.

Meanwhile, private bank investors, who had leveraged heavily to buy high-yielding paper from small and medium-sized companies two to three years ago steered away from such names in favour of high-grade borrowers given the concerns over defaults in the high-yield sector. As a result, SME issuers have been noticeable by their absence this year.

Restructuring gloom deepened in early June when AusGroup appointed KPMG Services to advise on a business review after it breached a financial covenant on a S$110m 7.45% bond that triggered an event of default. It is now appealing to bondholders for a two-year extension to the bond’s scheduled maturity in October.

Investors are still nervous about high-yield issuers, particularly oil and gas-related borrowers that have been hurt by depressed oil prices. So far, none of the Singapore offshore marine services issuers have defaulted on their bonds, but they are known to be facing stretched financial resources and have sought to restructure loans with the help of local banks.

The strains in the offshore marine services sector impacted Singapore banks last year, but such risks have eased this year and their credit strength remains intact.

“We think the Singapore banks continue to be extremely well provisioned as seen from their provision coverage ratios at 120%–130%,” said Matthew Phan, CreditSights’ analyst. “If collateral is included, the coverage rises to 3x or higher, and capital ratios also remain high.”

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