Bond investing getting stressful

Fixed income or bond investors generally expect to have a quiet life. It's why the typical asset allocation recommended for retirees is that bonds should make up the majority in a portfolio and volatile equities take a much smaller portion.

Singapore dollar (SGD) bond investors are supposed to sit back and collect the coupon or interest payment typically twice a year until maturity, which could be as short as two years or as long as 10 years. Or, in the case of perpetual bonds, which have no fixed maturity date, possibly receiving coupons for the rest of their lives. Most perpetual bonds sold in Singapore, however, have a callable date, which means the issuers can redeem the bonds, if they choose to, after a certain time has passed.

But, increasingly, bond investments are getting more uncertain. Some investors find it downright stressful as more issuers get into trouble or are finding it tougher in today's challenging markets.

Even bonds issued by government linked companies such as Neptune Orient Lines (NOL) are giving palpitations, as prices have fallen following the decision by Temasek Holdings to sell its majority stake in the shipping company to French company CMA CGM SA. One reason could be concerns over the change of ownership.

Since the decision last month by the Singapore investment company, notes issued by the container liner lost as much as 13 per cent, according to a Bloomberg report on Jan 8. Yields on the unrated bonds have surged to more than twice the levels they were first sold at starting in late 2010. When bond prices fall, yields rise and vice versa. The NOL 4.4 per cent 2021 notes were quoted at 73.251 by Bloomberg on Jan 18.

More heart-thumping moments are likely to await bondholders this year as economic growth remains tepid. This includes Pacific Andes Resources Development Ltd, which has not honoured some obligations on S$200 million of notes amid court battles and probes by regulators in Hong Kong and Singapore. The Singapore-listed company's shares have been suspended from trading since late November last year. Investors can request full immediate repayment if the company's shares are suspended for more than 20 days, according to the bonds' terms. The 8.5 per cent bonds due July 2017 were quoted at 25 by Bloomberg on Jan 18. When the bonds were sold in July 2014, the orders were said to be massively oversubscribed, exceeding S$2 billion and the lion's share went to private bank investors. Those who missed that deal must now be thanking their stars. Pacific Andes' woes are on the extreme side, of course.

Seeking a cure

Companies feeling stretched have been asking for a cure, or negotiating to relax financial covenants. In 2015, there were 14 consent solicitation exercises, compared with nine in 2014 and five in 2013 for SGD bonds, based on company announcements on the Singapore Exchange.

Most consent solicitations are due to three reasons: issuers need more wiggle room to prepare for challenging times, change in ownership or refinancing.

A common cure is to ask for a reduction in interest coverage and has been seen in many issuers from the oil and gas sector. They typically ask to amend the covenant on interest coverage to between one and three times, instead of at least three times. During good times, some companies had enough cash for interest coverage of even four times.

Offshore support vessels company Nam Cheong this month was among the latest to ask for covenant relief. It said the amendment will give it "increased operational and financial flexibility in light of challenging market conditions facing the global economy and the oil and gas sector".

Amending covenants provides the issuers with more operational flexibility to navigate the downturn, as well as help to avoid technical defaults, said an OCBC Bank Singapore credit outlook report on Jan 7. "On the downside, investors have less protection, or may face poorer recoveries should the issuers fall into distress. The negative headlines from offshore marine issuers seeking covenant relief have also pressured their bonds, exacerbating the poor liquidity situation already impacting the market for these issues," the report said.

Change in ownerships or joint ventures could also lead to changes as seen in the S$300 million 4.75 per cent perpetual bonds sold by Ascendas Pte Ltd in 2012. That deal was very popular with orders exceeding four times and private bank clients among those who clamoured for the perpetuals. In April last year, the issuer offered to redeem the bonds at 101 following a merger with another government owned entity. With the completion of the merger, Ascendas sold seven-year S$200 million 3.5 per cent bonds on Jan 11. This time the order book was S$270 million and private bank clients took only 4 per cent of the deal.

In deeper and mature debt markets like the US, bondholders are less receptive of requests to amend covenants. In fact, they are likely to react aggressively, like saying no and holding out to wring more concessions, said one banker. The US has funds which target distressed debt, he noted, adding: "We don't have that yet in Singapore."

Some lessons for bond investors here include looking harder at the issuers and not relying on name-lending, another way of saying don't be lazy and not do your homework just because an issuer has a strong link. Do also read the covenants and terms.

"Market swings are stressful...and can make investors more mature," added the banker. Which is kind of ironic considering the age of most bond investors.

Hock Lock Siew

This article was first published on Jan 20, 2016.
Get The Business Times for more stories.