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REVIEW 2015

More retail-friendly bond issues in 2016

Fixed-income market is tipped to be active while bond demand is seen staying healthy; perpetuals are forecast to remain popular
Monday, December 21, 2015 - 05:50
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Singapore's fixed-income market next year is tipped to be active, with more retail-friendly issuances.

Singapore

SINGAPORE's fixed-income market next year is tipped to be active, with more retail-friendly issuances.

What's more, perpetuals will continue to be popular even as financial conditions are likely to remain volatile.

Retail bond demand is expected to stay healthy and there should be more deals done than in 2015 - thanks to higher yields, said Clifford Lee, DBS Bank head of fixed income.

Four retail bonds with yields of 3.85 to 5.25 per cent were sold in 2015 by Perennial Real Estate Holdings, Oxley Holdings, Frasers Centrepoint and Aspial Corp. Investors could buy these bonds for as low as S$2,000 per lot, much cheaper than the minimum S$250,000 for most bonds sold here.

Mr Lee said retail investors are not dumb, unlike your "mom and pop" investors. "The smaller caps have smaller subscription, indicating they do have discretion."

While the retail offerings were oversubscribed, he said the oversubscription was not massive - an indication that retail investors know what they are doing.

The four retail bonds raised S$1.25 billion, against just one issue from CapitaMall Trust in 2014 worth S$350 million.

"Of the four issuers this year, three may even be 'high yield' - although none are rated - which may spur further issuance from other mid-sized firms which could offer higher yields on their retail bond issues," said Terence Lin, iFast's regional research manager in the fixed-income division.

Investors, especially financial institutions and real estate investment trusts (Reits), are expected to still like perpetuals - bonds with no fixed maturity - in 2016, as they did in 2015.

Seven perpetuals were sold this year which raised S$3 billion, almost double the S$1.8 billion for 2014.

Mr Lin indicated that issues such as the new Julius Baer, Ascendas Reit perps and FCL perps have so far been among the most heavily traded bonds in the SGD corporate bond market in 2015. "We think their popularity stems from the higher yields offered versus traditional fixed maturity bonds (given the additional maturity uncertainty), while most of the perpetual bonds are still expected to be called on their first call dates (which are usually less than 5 years away), making them good alternatives to traditional short duration bonds," he said.

Also, he added, many of the perpetuals are issued by higher-quality names, offering investors a level of comfort.

While more bank perpetuals are expected to be launched, as banks look to build additional capital, as well as to refinance maturing/callable debt, many non-bank corporate perpetuals are also maturing.

Firms such as Hyflux, Cheung Kong, Olam International, GuocoLand, Global Logistic Properties, Hotel Properties, Mapletree, Mapletree Logistics Trust and Genting Singapore are some of the existing issuers of perpetual SGD debt which are callable in 2016/2017, making them potential refinancing candidates/perpetual bond issuers come 2016.

Tan Kee Phong, OCBC Bank's head of capital markets, estimated that US$33 billion in loans and S$13 billion in SGD bonds are set to mature from syndicated loans in 2016 in Singapore. Yet nothing can be taken for granted, according to Elaine Ngim, Coutts' he ad of fixed income in Asia. "Two key factors that may determine if 2016 is a bull's or bear's year are how fast Fed will hike rates and how slow will China economic growth be," she said.

"China's growth story will be the larger factor for Singapore, as its economy is trade dependant on their growth. As a result, investors may become increasingly selective on quality of issuers and their industry," said Ms Ngim.

DBS's Mr Lee also said China would have the biggest impact on the Asian bond markets, because it accounts for the lion's share of the Asian G3 (USD, yen or euro) bond arena.

China-linked issuance in 2015 was 54 per cent or US$91 billion of the US$169 billion Asian G3 bond market. But offshore funding costs have ballooned and a lot of Chinese companies are now opting to issue onshore, Mr Lee indicated.

"If China continues to issue onshore next year, then it (Asian credit market) could get a kick in the stomach," he said.

The SGD bond market was pretty solid in 2015, especially compared with equities. This year has seen 161 deals worth S$22.7 billion done, slightly less than the S$23.5 billion raised in 2014. The highest was S$31 billion in 2012.

"2015 was comparatively a better year for bonds in Singapore when compared to the STI index, with main drivers being corporate bonds, specifically statutory board issuers in the 5-7-year maturity bucket," said Ms Ngim.

Up to Dec 11, the Singapore Fixed Income Indices for 2015 outperformed the STI by 17.64 per cent (1.87 per cent vs. -15.77 per cent).

Despite the year starting out somewhat jittery, there was no lack of higher risk issuers, Ms Ngim said.

"Looking back at these issues, 2015 is categorised by several buckets, namely the real estate developers and Reits who are listed on the SGX, shipping and the offshore support vessels, and closing off the year with a few global financial issuers," she said.

Still, some have found 2015 a challenging year for the SGD bond market.

"We believe credit quality of issuers, on average, declined, with particularly significant weakness seen in commodity linked companies and in the offshore marine sector, which is a sizeable part of the SGD bond market," said Neel Gopalakrishnan, Credit Suisse, director, emerging markets bond analyst, private banking Asia Pacific.

"Secondary market liquidity was another issue with no meaningful bids available especially for higher yielding bonds, making it almost impossible for bondholders to exit their positions if they were uncomfortable with the underlying issuer," he said.

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