High-yield issuers are flocking to the Singapore dollar bond market to feed the hunger of investors in the city state for riskier paper.
Hunger gains
Source: REUTERS/Nicky Loh
A Chinese family enjoys ‘lao yu sheng’ during a reunion dinner in Singapore.
Lower-credit borrowers from across Asia are beating a path to the Singapore dollar bond market as they seek alternative sources of funding.
The endless hunger of Singapore investors, particularly the broad base of private-banking clients, for higher-yielding securities opened the debt markets to small- and medium-sized issuers to raise funds last year. Many of the issuers were new to the debt markets, and 2014 does not look any different.
“This year will be about diversification, and bringing in new high-yielding names to the market will be the same theme as last year,” said one foreign debt syndicate banker.
Just two years ago, Singaporeans invested only in high-grade or large corporate credits. While this remains true for many of the domestic bond markets in the region, the dynamics in Singapore have changed. A persistently low interest-rate environment has encouraged investors to search for higher yields among bonds with lower ratings and longer durations.
This appetite has meant issuers are considering bonds from a number of small and mid-cap companies, which generally carry lower credit ratings and offer investors a little more of a premium because of their rarity in the market. These issuers, too, are eager to lock in financing before the expected rise in interest rates rise later this year.
The trend has not gone unnoticed in the region. Bankers say a number of high-yielding names from the region, especially out of Indonesia and India, have been exploring bond sales in Singapore.
These issuers did not make much headway late last year in the face of concerns over how the US Federal Reserve would end its accommodative monetary policies. However, since the Fed clarified its tapering schedule in December, yields on local bonds have risen about 10bp–20bp.
“This has made the pick-ups on high-grade names less attractive, which means investors will continue to shift to small- to mid-cap borrowers to earn that little extra return,” said another debt banker. “It could also spell the resurgence of perpetual, although investors are likely to be very selective on the names selling the undated assets.”
Issuers were swift to capitalise on that thirst for yields in January. Eight issuers sold more than S$2.1bn (US$1.66bn) of bonds in the first month of the year, according to Thomson Reuters data.
Two of the eight issuers – Croesus Retail Asset management and Mohamed Mustafa & Samsuddin – were making their market debuts. Both are also small-cap companies. Croesus Retail garnered a strong S$500m book for a S$100m 4.60% three-year bond.
A better-known credit, Hyflux, took the opportunity to sell a S$300m 5.75% subordinated perpetual non-call 3 bond that was more than 2x oversubscribed. At more than S$600m, the order book was among the largest in the city at that time.
Hyflux, a water management company in Singapore, however, had to pay up to sell its bonds. At a yield of 5.75%, the company’s latest perp pays a generous premium over its outstanding 6.00% perp securities. Those bonds, issued in April 2011 with a seven-year call date, were trading to yield 4.60% when the new perp priced. The new issue includes a step-up of 200bp at year three, which means investors treat it as three-year paper.
Few top credits
Investors hoping for investment-grade names may have few and far in between from which to choose. Only US$6.8bn of bonds are maturing this year, most of which were came from property companies and financial institutions. Moreover, bond bankers are competing for that business against syndicated loan bankers, who are courting large companies with competitively priced loans.
One familiar investment-grade credit could be in the market with an interesting deal. Temasek, Singapore’s sovereign wealth fund, said last month it was exploring the possibility of issuing retail bonds.
“Investors will continue to shift to small- to mid-cap borrowers to earn that little extra return.”
A retail offering would give Singaporeans an “alternative investment opportunity for those seeking stable returns with low risks”, Temasek said in a statement.
While plans are preliminary, the prospects of a Temasek retail bond will certainly kick some life into an overlooked segment of the city state’s capital markets.
Retail bonds were fairly popular with retail investors, but the trend faded in April 2012 after issuers found the process of selling the paper too cumbersome and expensive, involving a separate offering prospectus. This is unlikely to be a major issue for Temasek.
“Private-banking and retail accounts have been a prominent investor base in the Singapore dollar bond issuance market in the recent years,” said Marie Anne Garcia, credit analyst with OCBC Research.
As a result, Temasek had started exploring the possibility of tapping the retail market directly, a move that would allow it to diversify its investor base, Garcia said.
Covered bonds from financial institutions may be another source of high-grade issuance this year. The Monetary Authority of Singapore released its guidelines for covered bonds in December, clearing the way for banks to sell the structured product. However, any such deal is unlikely to come to fruition any time soon.
“We do not see any immediate need for Singapore banks to issue covered bonds in the near term,” according to a January OCBC credit report. The report added that “Singapore banks may opt to avail of the cheaper funding that covered bonds offer in the future should interest rates rise considerably”.
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