SGD bond market may see more retail, infrastructure deals in 2019

Singapore

FIXED income bankers may not be popping much champagne this Christmas given 2018's depressed volumes, but they can still toast some of the year's highlights such as Temasek's first retail bond and ultra-long deals from the Land Transport Authority (LTA).

Current volatility is expected to persist into 2019, and bankers are looking forward to more high quality retail bonds and possibly the first government guaranteed infrastructure deals.

"We believe 2019 will continue along the positive trajectory of second half 2018," said Samuel Chan, Standard Chartered Bank, head of capital markets, Singapore.

"SGD inflows into fund managers have been positive heading into 2019," said Mr Chan,

While new issuances of S$21.8 billion to date reflect a 12 per cent decrease from the 2017's S$24.8 billion, they are higher than 2016's S$19.3 billion, he said.

"That the 2H18 volumes of S$13 billion surpassed the S$11.5 billion printed in 2H17 is testament to the recovery of the market in the second half of this year."

Sean Henderson, HSBC Singapore co-head debt capital markets Asia Pacific sees more retail bonds following a strong reception for Temasek's maiden retail bond sold in October.

"Retail bonds are likely to become a more important funding source for high quality issuers with strong name recognition, particularly in an environment where yields have been increasing," he said.

"The lack of fixed income investment options for retail investors is likely to drive attractive funding levels for issuers who tap this investor base," said Mr Henderson.

The markets are functioning well, despite volatility and choppiness is expected to continue next year, said Clifford Lee, DBS Bank head of fixed income.

The first half of 2019 looks extremely tough, said Mr Lee. If the US- China trade tensions worsen and Chinese credit concerns continue, it will affect issuance volume adversely, he said.

China has seen a deterioration in credit defaults, since the beginning of 2018, with onshore credit defaults rising to a record high, said an IGM report in November. Policymakers have stepped up efforts in Q4 to improve the credit flow to the private sector but defaults will likely stay elevated for most of 2019, it said.

Mr Lee said the worry is that the Chinese credit stress which affects only onshore bonds is not contained and then may spread into the offshore USD market.

On a positive note, he noted that US interest rate hike expectations have dialled back somewhat to 1-2 next year from earlier 3-4 hikes by the US Federal Reserve. Slower interest rate rises will give the bond market breathing room, he noted.

The year had started with much promise as momentum was expected to continue from a bumper 2017 which recorded the highest volume since 2012.

January opened 2018 with a bang, volume rose a massive 141 per cent. By February, the party was over as skittish investors reacted badly to interest rate rises, with issuance a paltry S$610 million, down 80 per cent.

March staged a recovery due to bumper deals from the LTA and the HDB, but near-drought conditions returned in the next three months. June was the worst with only S$445 million worth of bonds sold.

The market rallied in Q3 with more mega issues from the LTA, HDB and local and foreign banks.

Collectively statutory boards - LTA, HDB and national water agency PUB - accounted for over 35 per cent of the year's volume at S$7.8 billion.

Still, the rather muted conditions for the SGD market is hardly unique as financial markets have been choppy through much of the year.

The broader Asia excluding Japan G3 currencies of USD, euro and yen is down a much bigger 20 per cent, said DBS' Mr Lee. "Despite very choppy market, and reduced volume, we continue to see good development," he said.

In particular LTA's long-dated bonds were the year's highlight. LTA issued SS$3.7 billion across 30-, 35- and 40-year tenors this year.

These long-dated, big deals will set the ball rolling for Singapore's ambition to fund infrastructure spending via the bond market, said Mr Lee.

The government said in February that it would consider providing guarantees for long-term borrowings made by statutory boards and government-owned companies to build critical national infrastructure. More recently an Infrastructure Asia Office has been set up to develop, finance and carry out infrastructure projects.

The government provided a guarantee for a US$300 million issue by Clifford Capital in early November, noted Andrew Wong, OCBC Bank credit analyst. Clifford Capital specialises in project finance solutions in the infrastructure and maritime sectors.

"The government did not mention any currency preference in their February statements although it makes sense to make these guarantees available beyond SGD issues to improve the pricing," said Mr Wong.

The year also saw Temasek's first retail bond. In October, Temasek sold S$500 million, 2.7 per cent, five-year bond, and opened the retail bond market for the first time under new regulations.

"The deal was noteworthy for highlighting the depth of retail demand available even for lower coupon product and strong issuers like Temasek, setting a strong precedent for other high quality corporates to follow," said HSBC's Mr Henderson.

Reinforcing the SGD market's depth and efficiency, there were several noteworthy transactions from foreign issuers.

In November, Hongkong Land's S$150 million, 3.95 per cent, 20-year issue, was the longest non-government linked issuance in Singapore dollar (SGD) in recent years, said Mr Henderson.

"This was also the longest foreign currency bond ever raised by Hongkong Land, highlighting the diversification benefit achievable from the SGD corporate bond market for strong and well known issuers. Importantly, this was also achieved at attractive funding costs relative to funding levels domestically," he said.

Other foreign issuers were UBS, HSBC and Commerzbank.

Another mega deal was from Hong Kong's Shangri-La Hotel which raised S$825 million in its maiden SGD fundraising exercise.

Local banks OCBC and DBS also sold bumper sized-perpetual bonds of S$1 billion each.