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Singapore-dollar bond market still robust despite Nam Cheong default

Analysts say investors unfazed, given liquid market and priced-in O&M debt woes

Singapore-dollar bond prices remain strong despite last week's S$365 million default by Nam Cheong, another offshore support vessel-focused group that has become insolvent.


SINGAPORE-dollar bond prices remain strong despite last week's S$365 million default by Nam Cheong, another offshore support vessel-focused group that has become insolvent.

The latest default means 13 Singapore dollar bond issues worth a staggering S$2.5 billion since 2015 have gotten into trouble. Yet investors are unfazed because of the flush liquidity situation, and also because the debt woes of the oil and gas/offshore marine sector are by now well documented.

"Nam Cheong's default hasn't rattled the market much; it is one of the names on everyone's "watchlist" of companies waiting to resturcture/blow-up," said Terence Lin, assistant director of bonds and portfolio management at iFast Corp.

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"We were expecting this to come much earlier, although I suppose bank negotiations take time," he said.

Said Todd Schubert, Bank of Singapore head of fixed income research: "We consider the Nam Cheong default to largely be an idiosyncratic event that was in any case largely already factored in by investors."

"The SGD market has been extremely vital so far this year with a new issue market that has been expansive both in breadth and depth.

We expect ongoing investor demand for SGD bonds to continue to be vigorous in the near future," said Mr Schubert.

The Markit SGD corporates' total-return index hit yet another high on Tuesday, touching 122.73, up 4.5 per cent year to date even though it eased slightly on Wednesday.

Although investor demand has been strongest for the investment grade and familiar name issuers, a number of foreign issuers and new bond types such as Singapore's first green bond has done well too.

And while investors are mainly keen on issues by bigger names, high-yield issues by small and medium-sized companies have also tapped the market.

For the first half of 2017, there were S$13.2 billion in issuance, up from S$13 billion in H12016, said Mr Schubert.

"Real estate and financial institutions, traditionally the largest sectors in the SGD market, continued to dominate, accounting for around 55 per cent of 1H 2017 issuance. However, we also saw a number of foreign institutions include Huarong Finance, Landesbank Baden-Wurttemberg and Lloyds as well as Singapore's first green bond by City Developments," he said.

"We expect full-year issuance to exceed that of 2016. The SGD market continues to be awash with liquidity looking for yield alternatives to cash and bank deposits. As long as global monetary policy remains subdued, demand for the asset class should remain robust," said Mr Schubert.

Full-year issuance in 2016 was S$19.1 billion.

Mr Lin said while sentiment is still somewhat cautious in the SGD new issue market, there's already a number of higher-yielding SGD issues launched this year. He added that he "won't be surprised to see further HY (high-yield) issuers test the SGD market later this year". "Swap rates are still near 2017 lows, so that may incentivise more issuers to raise debt sooner rather than later."

Some of the higher-yielding SGD bonds sold these year include Century Sunshine's 7 per cent, Heeton Holdings' 6.1 per cent, and Tuan Sing's 6 per cent. All are 3-year debt.

"Mainly IG (investment grade) still, but certainly more HY names compared to 2H16," said Mr Lin.

Part of the reason for the convergence of investors' appetite and issuer supply is the weak US dollar and the consequent low swap offer rates. Singapore-dollar bonds are typically benchmarked against swap offer rates.

USD/SGD on Thursday fell further to 1.355, its lowest close since last September, following the overnight dovish statement by the US Federal Open Market Committee which left interest rates unchanged.

Year to date, the Singapore dollar has gained 6.5 per cent against the greenback.

The SGD 5-year swap offer rate is down almost 30 per cent year to date, having lost 70 basis points to 1.70 per cent.

Mr Lin explained: Historically, movements in the USD/SGD exchange rate has had implications on the SGD swap offer rates, which are used as the basis of pricing most SGD corporate bonds.

"The decline in the USD/SGD exchange rate so far in 2017 has resulted in a corresponding drop in SGD swap offer rates, which has translated to bond price appreciation due to the lower yields on SGD bonds."

But buoyant investors must be wondering when interest rates will pick up or the USD will recover its strength.

Philip Wee, DBS senior currency strategist, believes the USD weakness will not last and forecast it retracing to 1.39 against the SGD by year end.

Devinda Paranathanthri, Asian credit strategist at UBS Wealth Management, said while he does not forsee any impact on the bond market from the latest default, he remains cautious on the SGD bond market and advocates that investors stick with quality issuers.

"We prefer subordinated debt of higher quality issuers for yield pick-up."