Risk-averse investors find safer harbour in Sing-dollar bonds

SINGAPORE bonds sales have so far been brisk in 2016, as risk-averse investors turn to high-quality debt.

The better credits have been quick to seize the opportunity to sell bonds, offering them lower interest rates and longer tenures.

In the year to date, bond issuance is up S$2.8 billion from 16 deals, against S$1.8 billion from 21 sales in the same period last year.

Included in this year's transactions are the bumper Housing and Development Board S$1 billion seven-year bonds at 2.50 per cent issue sold last month.

The notable characteristic among this year's deals so far - excluding that of the HDB's - is the dominance of high-quality corporates.

Neel Gopalakrishnan, emerging-markets bond analyst with Credit Suisse Private Banking Asia-Pacific, said: "If we exclude quasi-sovereign issuers such as the HDB, the Singapore dollar (SGD) denominated new bond issue volume is almost the same as last year's.

"However, the new issuance this year has almost entirely been from high-quality issuers such as DBS, Mapletree and Ascendas, whereas last year, the market was still open for smaller companies and first-time issuers."

This reflects the current risk-averse and weak market sentiment, which in the SGD bond space has also been affected by credit events such as bankruptcy and sell-offs among some high-yield names.

Mr Gopalakrishnan said: "The drying up of secondary-market liquidity in recent months in the smaller and high-yield issues is also likely to affect their access to the primary market.

" We believe, given the current conditions, the market is suitable only for high-quality issues."

Todd Schubert, head of fixed income research in the Bank of Singapore, said: "There remains a tremendous amount of liquidity looking for yield, and investors remain willing to invest in bonds issued by these types of companies."

Another characteristic is that longer tenures are now in fashion, as investors focus on the prospect of lower interest rates for longer.

The SGD had rebounded somewhat against the US dollar, which has caused the swap offer rate (SOR) to fall, making it cheaper for issuers, as corporate debt is generally priced against the SOR.

Terence Lin, assistant director of bonds and portfolio management in the fixed-income division iFAST Corporation Ltd, said that this year, the main driver of issuance so far has been the domestic interest rate environment, which is tied to the strength of the USD.

The USD had depreciated by around 0.9 per cent against the SGD in the year up to Feb 25; during this period, the three-year, five-year and 10-year SOR declined by 24.4 basis points (bps), 34.75bps and 39.25bps respectively.

The decline in rates has made issuance cheaper than at the end of last year for higher-quality issuers, which have not suffered from wider credit spreads in the face of difficult financial markets in 2016 thus far, said Mr Lin.

"Coupon yields on 2016 new issues so far range from 1.85 per cent to 3.79 per cent, with the low yields clearly reflecting the higher-quality nature of issuers, which have been able to tap the bond market so far this year," he said.

"We also note that the yield curve has flattened somewhat, with the longer-end dropping more than the shorter-end of the yield curve, incentivising issuers to issue longer-term," he said.

Capitaland Mall Trust's 10-year (privately-placed) S$100 million recent deal is a case in point; DBS, Ascendas and Mapletree Industrial Trust have also put out fairly long-dated issues, he noted.

Still, not everyone is enamoured with Singapore debt.

Devinda Paranathanthri, director of Asia Credit in UBS's Chief Investment Office, said that under the global UBS CIO asset allocation strategy, holding a diversified bond portfolio is recommended, among other asset classes such as equities and alternatives .

"Within Asia, we do not have a preference for SGD bonds, as we predict that the performance is likely to be lacklustre in the near term, as the valuations are fairly tight."

This may explain the not insignificant amount of privately-placed transactions. The current SGD new issue market is such that privately-placed deals took up a significant portion of the overall year-to-date issuance, said Mr Lin.

"We estimate that around S$500 million of the S$2.8 billion was done via private placements," he said.

"This may reflect the prevailing uncertainty in the financial market, where issuers gravitate towards private placements for the assurance of a successful issue, rather than leave it to chance, given the fickle and uncertain nature of the market."

lisen@sph.com.sg

This article was first published on March 1, 2016.
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