Another robust year expected for Singapore bond market

Singapore

THE Singapore bond market should remain buoyant in 2018 amid increasing economic activity and continuing momentum from a rousing 2017 that was the local debt market's best bar one since 2005.

Fixed income bankers point to overall improving economic prospects regionally and globally which will lead to more spending and funding needs.

At home, economists have raised 2017 full-year growth to 3.3 per cent, from a previous 2.5 per cent. They expect 2018 growth to be 3 per cent. The US has also been growing faster than expected and the Federal Reserve has lifted its growth estimate next year to 2.5 per cent from 2.1 per cent.

"Generally economic growth and sentiment continue to be quite firm and there will more capex (capital expenditure) spending," said Tan Kee Phong, OCBC Bank head of capital markets.

"Current attractive yields, strong investor liquidity and tight historical credit spreads remain attractive to issuers, and Singapore is a key regional financing hub so it should also benefit from funding activity from across the Asean region too," said Sean Henderson, HSBC deputy head of debt capital markets, Asia-Pacific.

Added Samuel Chan, Standard Chartered Bank head of capital markets, Singapore: "Bond redemptions will continue to be relatively high in 2018, coupled with unspent liquidity from 2017 and anticipated incremental demand. We believe issuance levels will remain robust, with spreads/yields remaining competitive, especially for high-grade issuers."

He expects both local and foreign banks to remain active in SGD issuance as about SS$8 billion of bank capital and corporate perpetuals become callable.

Developers looking for funding to pay for land are also likely to be active issuers in 2018.

Active land-banking and acquisitions by property developers could lead to increased SGD bond issuance, said Devinda Paranathanthri, UBS Wealth Management bond strategist. "We prefer quality developers that show a consistent track record, low-cost funding and well-located land banks acquired at reasonable costs," he said.

But rising interest rates is likely to have some impact on the market, according to Santosh Bukitgar, Credit Suisse Private Banking Asia-Pacific emerging market fixed income analyst. "In 2018, Singapore issuers will face rising interest rates which will significantly affect their cost structures," he added. "Bond issuers that need to re-tap the market face higher probability of the US Fed raising rates in 2018."

The Fed's latest rate hike on Wednesday, its third this year, has already been discounted by the markets.

As for further rate rises in 2018, the local bond market will be "constructive and continue to grow steadily," said Clifford Lee, DBS Bank head of fixed income. The market will be derailed only if interest rates move faster than projected, he noted, adding: "Market has been strong globally and Singapore is part of that."

The current optimism was absent 12 months ago when the long shadow of defaults from the oil and gas (O&G) sector cast a pall over the market.

But 2017 turned out much better than expected as the focus was on blue-chip issuers including banks - both foreign and local. In addition, the issuance of perpetuals or bonds with no fixed maturity surged with the equity-like instrument becoming an investors' favourite as they offered better pricing amid a lower for longer interest rate environment.

"The market is resilient; while the local defaulters are going through recovery, market volume has increased, it reflects the maturity of the market," said OCBC's Mr Tan.

OCBC, the No 2 in the league table, had a pretty good 2017. Its volume surged to S$5.047 billion, up 81 per cent from a year ago and outperformed the overall market which grew an average 30 per cent.

OCBC's market share rose to 20 per cent from 14 per cent in 2016. DBS Bank remains the leader; its 2017 market share fell to 34 per cent from 43 per cent.

Total issuance in 2017 rose 30 per cent to S$24.9 billion, as the market turned its back on O&G woes, decisively reversing the poor showing of 2016 when volume fell 16 per cent. The best year since 2005 was 2012 when bond issuance hit S$31.6 billion, according to Bloomberg.

HSBC's Mr Henderson noted the much-greater number of benchmark deals over S$500 million compared to 2016, with 18 deals versus 13 in 2016, "which shows evidence of a much-greater maturity of the market".

Among these mega deal makers were Mapletree, UOB, HDB and Singapore Airlines.

There was also a good number of cross-border deals from Manulife, HSBC, China Huarong and Commerzbank.

HSBC's Additional Tier 1 S$1 billion transaction was the largest corporate deal in the market since 2012.

"We were expecting it (2017) to be somewhat softer because of the credit stress of last year, so we were focusing on blue-chip names, with many new offshore companies," said DBS' Mr Lee.

Several of these were Chinese companies and, as part of their global fund-raising, Singapore has become one of their destinations. "I told them to expand their global offering coverage to include the SGD," Mr Lee said.

In April when China Huarong Asset Management issued a USD multi-tranche deal totalling US$2.97 billion, it also sold a S$600 million four-year bond. It then followed in November with another multi-tranche deal, comprising four in USD and one SGD.

Perpetuals were a big hit in 2017, as banks, property companies and real estate investment trusts (Reits) took to the flexible instrument in a big way. Reits like perpetuals because they help them meet the regulatory debt threshold.

At the same time with interest rates remaining low amid abundant liquidity, issuers were able to sell perpetuals at increasingly lower prices during the year.

Total SGD perpetual issuances rocketed to S$4.9 billion, an increase of 113 per cent.