Singdollar bond scene sizzles with latest issue raking in S$4b of orders

Singapore

THE Singapore dollar bond market is sizzling - Wednesday's S$500 million bond sale by Commerzbank AG is said to have taken orders approaching S$4 billion as investors clamour for yield.

Bankers say that after a rather tepid start to the year, the market is now seeing a confluence of factors - yield-hungry cash-flush investors and companies seeing the risks of interest rates hikes increasing are happy to deal.

"Perfect weather to print deals," said Clifford Lee, DBS Bank head of fixed income.

Elaborating, Mr Lee said that the market expects the US Federal Reserve to hike interest rates two or three times this year and this has led to investors asking for higher yields while issuers agree that rates will go up, so they're willing to price their bonds to sell.

The hot reception for the Commerzbank bonds resulted in the final price diving to 4.875 per cent from initial guidance of 5.25 per cent. The Tier 2 Singdollar issue by Commerzbank, Germany's second largest bank by market cap will be its first SGD-denominated Basel III compliant issue. Basel III compliant issues have a "non-viability" loss absorption feature, which means bondholders will be hit in the event of a default.

"There seems to be pent-up demand for SGD bonds given the dearth of new issues over 2H16," said Benson Tay, fixed income analyst at iFast Corp. "Along with the strong brand name of the issuers tapping the market so far this year, and the still-decent yield on offer, investors have been keen to snap up these bonds."

Year-to-date, SGD bond volume has reached S$3.64 billion, including S$1.33 billion from banks. So far, there has been 11 deals, with six sold in the past seven trading days.

For 2016, total SGD issuance stood at S$19.1 billion, with S$5.51 billion raised by banks.

Commerzbank's deal followed a S$750 million Tier 2 bond issue by United Overseas Bank Ltd on Monday which also got priced lower at 3.5 per cent from initial guidance of 3.75 per cent. Its orderbook is said to have reach S$1.8 billion.

Last Friday, there was another blockbuster - Frasers Centrepoint's issue was upsized to S$398 million from initial target size of S$300 million following a strong S$1.35 billion reception. The transaction was priced at 4.15 per cent from an initial price guidance of 4.5 per cent.

Said Pee Beng Kiong, OCBC Bank head of bond syndicate: "The ability of Frasers Centrepoint Limited to be nimble, coupled with their recent strong first-quarter earnings, enabled the company to perfectly match investor demand for bonds by high-quality issuers."

OCBC handled the deal.

"The fact that the bonds rallied by 25-30 cents in secondary market performance validated both the investors' commitment to participate in the deal and the issuer's understanding of the market," he said.

Bond prices have continued their strong rally since the start of the year. The Markit iBoxx Singapore corporates return index reached a high of 119.2972 on Feb 17 before easing to 119.2972 on Tuesday.

Clarissa Lee, UBS wealth management bond analyst, said that there has been pent-up demand from SGD bond investors, which could explain the healthy order books for the recent issuances.

The total volume of SGD bonds maturing or callable in 2017 is S$21 billion, according to Bloomberg data. Year-to-date, the amount which has matured or been called is S$3.5 billion.

"We also note that the recent SGD bond issuers are of relatively high quality, which appeal to investors who wish to focus on good credit quality issuers," she said.

DBS's Mr Lee said that if demand for SGD bonds were hot, then that for USD deals is even more so.

Last week, Huawei's two tranches totalling US$1.5 billion took in combined orders of US$7.6 billion. A Road King US$300 million perpetual bond sale received orders of over US$5.5 billion.

UBS's Ms Lee also said that there was more value in the USD bond market. "We advocate a defensive approach, avoiding long-duration issues with expensive valuations for investment grade and high-beta issues with risks for high yield. We will look for opportunities during any sell-off in the coming six months to add risk in both the primary and the secondary markets."

Devinda Paranathanthri, UBS Asian bond strategist, added: "For SGD bond investors, we advocate a defensive approach, preferring to stay invested with higher quality corporates, and see value in bank subordinated debt and selected property/Reit perpetuals."