Local bond market headed for another buoyant year

Local bond market headed for another buoyant year
PHOTO: Local bond market headed for another buoyant year
Mr Henning: Genting's two perpetual bond issues - of $1.8b and $500m - are sizeable by any measure and have proven investors' acceptance for long dated subordinated debt instruments.

SINGAPORE - For the local bond market, 2013 is expected to be just as buoyant as the year gone by.

It will be the main draw for investors looking for yield and probably see more lower-rated companies and foreign issuers emerge.

But it's less certain whether one of the themes of 2012 - the popularity of the more risky perpetuals which fizzled out by the third quarter - will be repeated.

Perpetual securities have no maturity date and are more risky over plain vanilla bonds.

With 2012 almost over, total SGD bond issuance jumped to over $31 billion. This is almost 50 per cent higher than that for 2011 and nearly five times more than a decade ago.

Perpetual bonds issuance saw an impressive 200 per cent plus increase.

Gaming operator Genting tapped the market with a $1.8 billion perpetual bond issue at a coupon rate of 5.125 per cent in March 2012. The following month Genting issued another $500 million perpetual bonds at the same coupon, targeting retail investors.

"These are sizeable issuances by any measure and have proven investors' acceptance for long dated subordinated debt instruments," said Bryan Henning, Barclays head of research and investments.

Perpetuals or not, bankers are expecting a busy 2013 as the low interest rate climate will spur corporates to sell more debt.

"The drivers -low rates, manageable inflation, robust liquidity - are expected to continue to power buoyant primary activity in the first half of 2013," said Tan Kee Phong, Standard Chartered Bank Singapore director and head, capital markets.

According to Ronny Chng, UOB managing director and head of group investment banking, many Asian companies have grown more sophisticated and, as they expand abroad, require more than just bank loans.

More small and medium enterprises are tapping bond markets to fund their expansion and to reduce concentration risks, he said.

"In 2012, a number of companies with smaller market capitalisation and lower-rated issuers successfully tapped the market for their funding needs," said Sim Buck Khim, OCBC Bank co-head of capital markets.

Lower-rated issuers included Aspial Corp and Swiber Holdings.

Aspial, a jeweller-cum-property developer and pawnbroker sold 2-year $65 million 4.5 per cent bonds in September.

Offshore marine company Swiber finally succeeded in its maiden perpetual sale. In October 2011, it had to can a perpetual issue despite a tantalising 8 per cent guidance after it received tepid response.

But almost 12 months later, investors were offered a mouth-watering 9.75 per cent non-call 3-year which means the perpetuals cannot be called or redeemed until Year 3. At Year 3, if the securities are not redeemed, the coupon steps up by 300 basis points.

Investors took the bait and orders reached $125 million for the $80-million issue.

The market also saw more foreign issuers, which have no requirement for SGD.

"There was a modest move towards the internationalisation of the SGD bond market as issuers from outside Singapore sought to raise medium- to long-term SGD," said Hans-Peter Borgh, ABN Amro Bank, chief commercial officer, private banking Asia & Middle East.

"In many cases, these issuers have no particular need of SGD but are able to borrow at attractive levels and swap into their home currencies. They were mostly investment grade issuers from both developed and emerging economies though there were some exceptions such as Chinese property companies," said Mr Borgh.

Foreign issuers included Indian state-owned IDBI Bank and Indian Oil Corporation and ABN Amro bank.

ABN Amro Bank, which raised $1 billion bonds in October, found that after swapping out, the funds were still cheaper compared to a previous US dollar issue.

Amid the buoyant market, some are asking if a bubble might not be building, and if investors, many of whom were first timers, have done enough homework on the potential risks of what is after all a tradeable asset.

The Asian Development Bank warned last month that the Asian local currency bond markets which have outperformed face the risk of capital flight should an event such as the US fiscal deficit trigger a recession.

The same month saw Olam bonds fall more than 20 per cent after short-seller Muddy Waters questioned the commodities company's solvency and accounting practices.

"It was a wake-up call for investors to analyse the credit," said Rajeev De Mello, Schroders's head of Asian fixed income.

"In the long run, such incidents raise awareness; there are inherent risks in all market instruments," said Clifford Lee, DBS Bank head of fixed income.

DBS continues to rank head and shoulders above its peers in the bond league table, with over 34 per cent market share.

Mr Lee thinks that if there is a capital flight from the region, local currency bonds will be less badly hit.

"We have natural long term investors, insurers, asset managers, private bank clients with SGD deposits," he said.

"Foreign participation in local issuances is in the minority and is typically less than 10 per cent of the total participation. The capital deployed into new issues has been from buy and hold investors and are therefore less susceptible to take flight out of this asset class," said OCBC's Mr Sim.

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