Singapore's aunties and uncles take risks in hunt for yield

SINGAPORE - Singapore's aunties and uncles piled into a S$200 million retail bond last week from Aspial Corporation, drawn to a juicy 5.3 per cent yield despite the unusually high leverage of the jewellery-to-property group.

The original S$50 million public tranche drew applications totalling S$254 million by the time the offer closed last Tuesday, allowing Aspial to increase the issue to the maximum of S$200 million.

The sale, Aspial's second retail bond offering in seven months, renewed concerns among experienced investors and bankers in general that the public may be fooled by generous yields, ignoring the high risks that these often entail.

"Selling retail bonds of companies with challenged credit metrics without discussing their risks is not right," said a high-net-worth investor. "Not all retail buyers understand the risks, and no one can argue with that."

Credit analysts estimate the issue will push Aspial's total bond debt to around S$516 million. The group's net debt-to-Ebitda stands at 75x, while its interest coverage ratio is around 0.8x, well below the 1.5x threshold usually considered necessary for a company to borrow money and service its debts.

"We are underweight on Aspial bonds as the company is too highly leveraged," said one credit analyst. "I'm surprised that its bonds are being offered to the public."

However, the retail bond will have a positive impact by reducing near-term refinancing risks. Aspial has a S$50 million 5 per cent bond due on July 22, and a S$80 million 4.5 per cent bond due in January next year.

DBS was the sole lead manager.

Buyer beware Concerns that the public were ignoring credit fundamentals to chase yields were quietly voiced last August when Aspial sold its first retail bond, raising S$150 million in a 5.25 per cent five-year offering. It was followed by Perennial Real Estate in October and Oxley Holdings in November, both fairly highly leveraged companies.

Market chatter indicates that Perennial is mulling a second retail bond this month, just a month after it raised S$125 million from a sale of three-year senior bonds at 4.9 per cent. The property company is less leveraged than Aspial, but its ICR is still low at 0.9x and its net debt-to-Ebitda is 30x.

Retail investors are chasing higher yields because deposit rates are so meagre. For example, a two-year fixed Singapore dollar deposit with a local bank pays only 1 per cent. There are no rates quoted for beyond 24 months.

For institutional investors, however, the 5.30 per cent yield on Aspial's new bonds is too tight relative to the outstanding 5.25 per cent due August 2020, which is quoted at a bid of around 5.65 per cent.

The Monetary Authority of Singapore reiterated that issuers selling retail bonds have to comply with the Securities and Futures Act, which requires "proper disclosure of the information that would be relevant to investors". In response to queries from IFR, the MAS said such disclosure includes features and risks of the bonds as well as information on the issuer, including key financial information.

Aspial lodged a product highlights sheet on the MAS website, which retail investors presumably would have read before hitting the ATM terminals to apply for the bonds, where the minimum order was S$2,000. But rival bankers and sophisticated investors questioned whether amateur investors would spend time studying the financials.

In addition to the alluring yield, the retail offering drew on the familiarity of the Aspial brand. The group operates a chain of popular jewellery stores across Singapore and also controls the network of Maxi-cash pawnbrokers. It also owns and develops properties.

Ultimately, the responsibility lies with the retail investors to understand exactly what they are buying into - a point that MAS stresses. "Investors must play an active role in safeguarding their own interests," said MAS.

"They should be mindful that higher returns are correlated with higher risks, and should only invest in products that they understand and find suitable based on their financial objectives, risk tolerance and investment experience."