Bonds pip equities in fundraising by firms as investors chase yield

Singapore

CREDIT rating be damned - investors in Singapore are hungry for yield, and corporate issuers have of late seemed happy to sate those appetites. As the local stock market languishes, high-yield bonds and perpetual securities (perps) appear to have overtaken equity fundraising in terms of popularity, with the recent retail perp issuance by Hyflux raising more funds than the company's entire market cap.

Hyflux's recent success and other unrated high-yield retail offerings in Singapore largely stems from investors' quest for high fixed returns amid low interest rates and market volatility, market participants note. And though high-yield fixed-income instruments will not replace equity capital markets in the long run, the former may be more attractive for at least the near term, they say, adding that corporates are also increasingly moving away from bank loans towards bond and debt-like instruments that give them wider access to capital.

Hyflux, a well-known homegrown water solutions firm, expanded its recent issuance of 6 per cent perps from S$300 million to S$500 million - significantly more than its market value of about S$440 million - due to surging demand in May.

Earlier in May, property developer Oxley Holdings issued four-year 5.15 per cent retail bonds in a S$150 million offer that was oversubscribed. Perennial Real Estate in April expanded its offer size for its four-year 4.55 per cent retail bonds from S$200 million to S$280 million. And in March, investors snapped up S$175 million of property and jewellery group Aspial's four-year 5.3 per cent retail bonds. That public offer was subscribed five times.

The trend could continue. Corporates are increasingly moving towards raising funds through debt instead of through equity, market watchers say, pointing to government moves to further develop the Singapore bond market along with depressed conditions for equities relative to debt.

TSMP joint managing director Stefanie Yuen Thio said: "In this relatively buoyant bond market, it is easier to raise a large amount through notes and bonds, especially for companies that have good standing in the business community. Also, the MAS (Monetary Authority of Singapore) recently announced measures to make the bond market more accessible to retail investors, and that should make it even easier and cheaper for corporates to tap this market.

"Many of these bonds are issued by financially stable issuers who believe that this is a good way to raise financing for their corporate needs. They are tapping a market where retail investors are getting increasingly sophisticated and are also looking for better returns. Given that the equity market has not been having a stellar year, including for Reits, bonds are a good way for investors to make returns."

Peter Greaves, restructuring leader at PwC Singapore, said that companies are probably shying away from using equity issuances to raise funds, given current low valuations. "Q2 of 2016 has seen a marked increase in issuances relative to Q1. In an environment where asset and enterprise values are low, it is not surprising that businesses are looking to fixed coupon options to avoid sacrificing large equity stakes, particularly when they envisage value returning in the long term . . . Increasingly we are seeing short-term solutions being used to defer a longer-term restructuring of debt, as management want to avoid basing longer-term refinancing on depressed profit/value ratios."

And in their shift towards debt, companies are not relying just on traditional bonds but going for hybrid instruments such as perpetuals - which regulators view as equities and therefore do not bump up a company's gearing, even though perpetuals offer fixed payouts.

"Corporate perpetuals have been active due to the need for issuers to manage gearing levels and shore up balance sheets for future growth as revenue growth remains weak, as well as a relative reduction in duration risk from a year ago," said Andrew Wong, credit analyst at OCBC Bank.

Market participants point out, though, that the success of recent high-yield fixed-income retail offerings does not necessarily mean high-yield bonds and perps will take the place of equity fundraising in an issuer's plans.

Clifford Lee, head of fixed income at DBS Bank, said: "It's not quite accurate to say companies are moving from equity fund raising to bonds. The big shift is away from bank debt to bonds. They're both debt, but the latter will see corporates being able to have a broader access to debt. One of the problems that caused the Asian financial crisis was that companies were dependent on a handful of banks and that if one bank withdrew funding the rest could follow."

DBS handled Hyflux's, Oxley's and Aspial's recent issuances and worked with UOB on Perennial's.

"Perps have a higher chance of replacing equity fundraising exercises, but the perp market is still very new," said Mr Lee. "If you compare it with the equity market in recent months then clearly, any activity will beat that. But if you compare the amount . . . the market for straight equity issuance is a lot more mature and a lot deeper than for perps.

"The more sophisticated corporates would be able to strike a healthy balance. They can't go completely to perps because perps come with an implicit obligation to call it. Unlike equity, there's a commercial shelf life."

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