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S$4.8b of SGD bonds redeemed early even as S$785m in default

Amount made up of 16 issues so far this year; collateral damage leads to mispricing of some bonds as market carnage continues
Friday, October 21, 2016 - 05:50

cordlife.jpg
Cordlife Group has asked bondholders to a meeting early next month to get their approval to redeem their debt ahead of maturity, an event which has received little publicity amid the chatter on bond defaults.

Singapore

CORDLIFE Group has asked bondholders to a meeting early next month to get their approval to redeem their debt ahead of maturity, an event which has received little publicity amid the chatter on bond defaults.

In fact there's the danger of collateral damage threatening bonds issued by companies with strong balance sheets with some of the prices of these bonds falling to distressed levels.

Year to date (Oct 18) S$17.4 billion worth of bonds have been redeemed, including a chunk redeemed ahead of their scheduled maturity, compared with S$785 million of bonds which have defaulted, restructured or are in the process of restructuring.

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The chorus of bad news hogging the spotlight is lumping companies with strong balance sheets with those flush with cash, said Terence Lin, assistant director of bonds and portfolio management at fund researcher iFast.

"Some are probably still fine but the general sentiment doesn't make them look good; good companies/bad companies are being sold off," said Mr Lin.

The price of Dyna-Mac bonds fell to 92 cents on the dollar before the company announced on September 8 it would get bondholders' approval to redeem the bonds ahead of its August 1 2017 scheduled maturity date.

Although Dyna-Mac operates in the troubled offshore and marine space, it had a net cash position end-June 2016, noted Mr Lin.

Bonds are sold at 100 par.

"There was a sell-off in Singdollar bonds after August, it was collateral damage," he said, referring to Dyna-Mac's price which had fallen to distressed levels prior to the redemption announcement.

Dyna-Mac redeemed the S$50 million worth of bonds earlier this month.

Another bond which has slumped is CW Group Holdings, whose price of around 88, or a yield of about 15 per cent, is "mispriced" as it suggests dire business conditions and stress in the company's financials, which is not the case, Mr Lin said.

"At 15 per cent (yield) the risk reward has turned in favour of the bond investor," said Mr Lin, who calls the bond "attractive."

The poor sentiment surrounding SGD bonds is also making it difficult for small companies to raise debt, and investors fearful of investing their growing mountains of cash.

Clifford Lee, DBS Bank head of fixed income, said it's like a "fixation" that the entire SGD bond market is in trouble "which is not true."

He noted that Singapore companies are healthy overall when you look at the redemptions which have been taking place so far this year.

Year-to-date some 122 deals amounting to S$11.8 billion have matured as scheduled while 16 issues amounting to S$4.87 billion have been redeemed ahead of maturity.

There are three main reasons for redemption ahead of maturity:

Several issues redeemed this year are perpetuals which have call dates, that is, the issuer has the right to call or redeem at a certain date.

Others are due to refinancing of existing bonds with cheaper or more efficient alternative funding, such as taking out a bank loan.

"It could be refinancing for longer tenure at a more efficient rate," said Mr Lee.

Some early retirement of bonds is due to a lower requirement for funding in view of more cautious market sentiment and slower future business growth expectations, he added.

Genting's strong "fortress-like" balance sheet - as at end-June 2016, it had a whopping cash balance to the tune of S$4.87 billion - means the firm is likely to call or redeem its two perpetual bonds worth a combined S$2.3 billion in the second half of 2017, said Mr Lin.

But cash flush investors are wondering what to do with their money.

Said Neel Gopalakrishnan, Credit Suisse, emerging markets bond analyst, private banking research: "Finding good quality bonds in SGD is a challenge for investors."

In the absence of suitable alternatives, investors would need to move on to another asset class in SGD or invest in bonds of other currencies, he said.

"For example, the USD bond market has much deeper liquidity and choice of credits compared to the SGD bond market, and investors could also potentially benefit from currency gains, given our expectation of a gradual depreciation in the SGD."

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