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Alarm for Singapore bonds as private bank bid falters

[SINGAPORE] Signs that wealthy private banking clients are reining in their appetite for Singapore dollar bonds could spell trouble for the small and medium-sized companies that are streaming to the city's capital markets.

Local high-yield bonds came in for a battering this week as private banks started to dump some credits. Several bonds fell two to three points, but the worst hit were Swiber Holdings'notes, which fell 10-15 points across the curve over the last week and a half. "Investors are running for the door but they can't find bids, so there is now no exit," said one banker.

Private banking clients have dominated the Singapore dollar market over the last two to three years, supporting many corporate perpetuals and an increasing number of high-yield or unrated bonds from small-cap borrowers.

The sudden slump underlines the risks attached to illiquid placements that rely heavily on private bank demand, highlighting the refinancing risk for borrowers should markets turn volatile. Swiber's 9.75 per cent senior perpetual with a call in 2016 were indicated at a yield as high as 21 per cent to the call last week. It would be impossible for the company to sell any bonds at the moment.

Credit analysts said PBs were increasingly selective of the assets they would buy, but stressed that demand remained strong for credit in general. "PB demand has tapered off a bit," said a credit analyst."But it is very deal-specific and in the long-term their appetite for bonds is still very strong given yields are extremely low in terms of interest rates." "The volatility in the secondary market goes to show that investors have to do their credit work and study each issuer's fundamentals and financials," said Vishal Goenka, Deutsche Bank's head of local currency credit, Asia.

The bearish sentiment spilled over into the primary market, where Aspial Corp received a muted response to its third issue of the year. The S$100m four-year deal attracted a book of just over S$100m, leaving little upside for the bonds in the secondary markets despite a higher yield and a 50 cent rebate to private banks.

The bonds paid a yield of 5.500 per cent, far higher than the 5.306 per cent it had paid just five months ago for a longer tenor of five years.

The Aspial deal came only weeks after small-cap Loyz Energy was forced to abort a bond issue after offering a rich 9 per cent yield for a 2.5-year tenor and a 75-cent rebate.

A couple of PB clients failed to deliver at the last minute, scared off by a deteriorating global credit market. Loyz's recent history did not help either; in September, it had a dispute over a US$4m loan given by Advance Capital Partners. The company's market capitalisation was S$82.4m when it emerged for a deal in late October. This had dropped to around S$64m last week.

A major consideration for investors was also Loyz's core business in the oil and gas sector. Crude oil prices slumped to below US$75 a barrel last Wednesday, and market expectations are for a slowdown in oil exploration and production activities. Investors are betting that this will have a future impact on the oil and gas borrowers that were out in force this year to raise funds in Singapore.

Oil prices

In the light of this, Swiber Holdings' latest financial results came at the worst possible time. The Singapore-based marine oil services company announced on November 12 a 60.9 per cent year-on-year fall in revenue and a 97.8 per cent fall in gross profits for the third quarter of the year. Net gearing rose to 1.7x from 1x a year ago.

The company has won orders amounting to only US$315m this year to date, compared with last year's US$588m. Swiber's stock fell 5 per cent on November 13, hitting a three-year low.

The Singapore dollar-denominated 2017s traded at 92.45 last Wednesday while the renminbi-denominated bond due 2017 was quoted at 75.00, although another trader quoted 85.00/90.00. "The prices are all over the place, but it appears that the Swiber sukuk has been the least hit," said one sukukholder. The 6.5 per cent sukuk due 2018 had slipped a dollar to a cash price of 98.00/98.75 on Wednesday.

One investor said there appeared to be an upside for Swiber as it was bidding for a few contracts that could come in by year-end.

Not all high-yield oil and gas-related bonds have been burned. Ezion Holdings, which is in the offshore rig business, sold a S$150m 7% perpetual non-call four deal in mid-November that drew a decent book of S$300m. The bonds were holding up around par last Thursday, unscathed by price action elsewhere.

Ezion turned in strong third-quarter financial results with a 28.9% increase in net profit, and sits on a healthy cashpile expected to reach around US$398m by year-end.