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Singapore bond market frenzy distorts credit costs, S&P says

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Recent offerings from issuers such as state investment company Temasek Holdings Pte Ltd, port operator PSA Corp and electricity distributor Singapore Power Ltd were "well over-subscribed" amid heightened threat of non-payments by riskier borrowers across South-east Asia, analysts Bertrand Jabouley and Xavier Jean wrote in an e-mail interview.

[SINGAPORE] Corporate bond offerings by some of Singapore's biggest companies are drawing such strong demand from investors that they are artificially lowering borrowing costs for weaker borrowers, according to S&P Global Ratings.

Recent offerings from issuers such as state investment company Temasek Holdings Pte Ltd, port operator PSA Corp and electricity distributor Singapore Power Ltd were "well over-subscribed" amid heightened threat of non-payments by riskier borrowers across South-east Asia, analysts Bertrand Jabouley and Xavier Jean wrote in an e-mail interview.

Singapore's bond market suffered its first defaults since 2009 when PT Trikomsel Oke missed payments on two bonds with S$215 million of face value in late 2015.

Fishery group Pacific Andes Resources Development Ltd reneged on a S$200 million note in January, while recent debt failures across the region have included PT Berau Coal Energy and 1Malaysia Development Bhd.

"In an environment of perceived rising risks, flight to quality has been a bit irrational," the Singapore-based analysts wrote.

"Issuance of highly creditworthy corporates and the frenzy they trigger do not revive the market but simply artificially adjust the cost of credit to the downside, as everyone raising bonds benchmarks their cost of funding against them."

The phenomenon isn't unique to Singapore's debt market. S&P's study shows there's "limited differentiation" across capital structures among 150 prominent listed entities in South-east Asia.

Their median cost of funding has fluctuated in a band of 100 basis points, or 1 percentage-point, regardless of their balance sheet quality or leverage levels, the analysts said.

"It is not much more onerous to finance a levered balance sheet," Mr Jabouley and Jean wrote.

"Credit risk has looked ill-priced in Asean."

PSA Corp sold US$500 million of 10-year bonds in April, attracting about US$1 billion of orders, according to Bloomberg-compiled data, while Temasek's offerings of euro-denominated notes in February also drew large bids.

Singapore Power got orders double the size of its US$700 million sale of 10-year notes in November.

"As more defaults happen in the domestic bond markets, we think the market will gradually differentiate credit risk better by raising the funding costs for the more leveraged corporates," the S&P analysts wrote.

BLOOMBERG