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Private placement investors stepping up to address cash crunch

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Clifford Lee, DBS Bank head of fixed income, says that since March, six out of seven Singapore dollar bond issues have been done on a private placement basis.

Singapore

WITH bond markets seizing up or showing extreme volatility, private placement investors have stepped up and helped address cash crunch concerns.

Since March, six out of seven Singapore dollar bond issues have been done on a private placement basis, said Clifford Lee, DBS Bank head of fixed income. PSA Treasury, SATS and Keppel Corporation were among those which have made private placements to such investors which include insurance firms and banks.

During periods of extreme volatility, trading-oriented investors will not enter the market because they worry about mark-to-market losses.

"Private placement investors are longer term investors who see the wider spread as an opportunity to buy in," said Mr Lee.

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Private placements have been a regular feature of the bond market, said Kenneth Yeoh, OCBC Bank head of bond origination, capital markets. They are often driven by a reverse enquiry from investors who are interested in a specific credit, and are then matched with a corporate issuer.

During normal market conditions, most bond deals tend to be transacted as public offerings for larger investor distribution, even if the deal was initiated as a reverse enquiry.

"During times of bond market disruption such as now, when the general market is side-lined and a public offering may not be viable, bonds can continue to be issued via private placements as long as the investor(s) and issuer can agree on the terms," said Mr Yeoh.

The SGD deals done in March and April via private placements were mostly with established Singapore blue chip companies, he added.

Fixed income markets globally began seizing up from late February and the US dollar bond market was closed for about nine days until the US Federal Reserve's March 23 announcement that it would start buying bonds directly from the market, said DBS' Mr Lee.

PSA, which sold S$500 million 1.63 per cent 10-year fixed rate notes on March 9, initially wanted to sell USD bonds, he said. Guaranteed by PSA International, rated Aa1 (stable) by Moody's and AA (stable) by S&P, it normally issues in the much bigger USD market which has tighter, or cheaper, pricing.

At the time, the USD market was "dislocated" and "we found that we could do an SG dollar deal more efficiently via private placement," said Mr Lee.

The 10-year US Treasury had dropped to below 1 per cent, and was headed towards 50 basis points by March 9, before it swung back up to almost 1.2 per cent on March 18. On April 20, it was 63.5 basis points.

"People felt it was ridiculous... you can't price with such swings," said Mr Lee. "Realising the funding windows were closing rapidly, we helped PSA identify a private placement opportunity and swiftly executed it."

The 10-year coupon rate of 1.63 per cent is the lowest bond yield ever achieved in PSA's history of debt capital market access in the Singapore dollar, he noted, adding the spread is still wider than in normal times. The 1.63 per cent coupon rate is made up of the 10-year SGD swap offer rate (SOR) of 87 basis points (bps) plus a spread of 76 bps.

Very few AA/Aa1 names issue in SGD, so it is difficult to get a direct SGD comparison, said Mr Lee.

Due to the tighter pricing afforded to such issuers in the USD market in recent years, they have been issuing in USD instead and swapping the proceeds to SGD to achieve even tighter pricing. Therefore, scarcity value in an SGD issue by PSA is certainly a draw, he said.

The last time PSA issued an SGD paper was in 2010, at a spread of around 41 bps over 10-year Swap Offer Rate (SOR) for a similar 10-year bond.

SATS Ltd issued two bonds also to private placement investors. The first was a S$200 million 2.88 per cent 5-year fixed rate notes on March 25, followed by another S$100 million on April 17. DBS and United Overseas Bank handled the SATS deals.

Both PSA and SATS will use the funds raised for general corporate purposes and to refinance existing borrowings.

On April 13, Keppel Corp did a S$250 million 2.25 per cent 5-year issue on private placement basis.

In Hong Kong, DBS was the dealer for the Hong Kong Airport Authority HK$900 million 2.30 per cent 10-year notes to private placement investors last week.

During these times, "it is a matter of looking into different currencies, to see where the private placement investor opportunities still exist for issuers", Mr Lee said.

Year to April 9, volume in SGD bond market has dropped 26 per cent year-on-year to S$4.5 billion from 20 deals.

DBS, the market leader, has seen its market share surge to 45 per cent, up from 31 per cent in the same period last year. The bank's volume is up 5 per cent on year.

Global bond markets are now working normally, following the US Fed's direct buying of bonds, with similar moves by European central banks.

"In the USD bond space, we have seen a gradual re-opening of the market with several high-grade Asian sovereign and sovereign-linked institutions and blue chip corporates issuing in the public markets in recent weeks compared to the total absence of Asian bond deals in early March," said OCBC's Mr Yeoh.

These include Beijing-based Lenovo which sold a US$650 million 5-year bond, while state-owned enterprise China National Travel issued two tranches of 5- and 10-year bonds worth US$900 million.

There was also ST Engineering's US$750 million 5-year bonds which took in orders of over US$4 billion.

These marked the first two corporate bond deals priced in Asia since the market closed up a month ago due to the Covid-19 crisis, said Mr Lee.

In Singapore, bond investors are closely watching the SGD bond markets for positive signs on the global Covid-19 situation and hints of economic recovery, said Mr Yeoh.

"We are keeping a close eye on these market developments with a view to assist our customers with their fund-raising requirements," he said.

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