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Many blue-chip bond issuers not buying credit rating story

MAS grant to defray expenses seen benefiting only smaller players for now

"In practice, airlines' credit quality will typically not be consistent with the highest rating categories, like AAA," says S&P's Bertrand Jabouley, backing SIA's point that very few airlines are rated.


IT seems that for some of Singapore's blue-chip companies, it would take more than a grant to get them to obtain credit rating for the bonds they sell as they have no problems accessing the very liquid debt market.

The Credit Rating Grant, announced last week to encourage credit ratings in the Singapore dollar bond market, pays 100 per cent of credit rating expenses, subject to a cap of S$400,000 per issuer.

In offering the grant, the Monetary Authority of Singapore said that it would like to see a higher share of rated issuances in the SGD bond market.

Currently, only about half of the outstanding volume of SGD bonds are rated. In 2016, 32 per cent of SGD bonds issued were rated, down from 56 per cent in 2015 and 75 per cent in 2014.

But the two main reasons for the drop in the proportion of unrated bonds each year are the fall in the issuance of high yield unrated bonds and the Housing & Development Board (HDB) obtaining a credit rating in October 2015. HDB is the single largest SGD issuer with outstanding volume of S$22.95 billion.

A list of the 20 most regular SGD bond issuers show that eight sell unrated bonds. They are some of Singapore's best known entities, such as CapitaLand, Land Transport Authority of Singapore, Mapletree Treasury Services, Singapore Airlines and PUB.

A fixed income banker said that a rating per se does not guarantee the issuer a better outcome, neither does the lack of one lead to a worse outcome.

While the S$400,000 grant is serious money, yet for some of Singapore's biggest companies, it cannot make up for the management time which would have to be spent on obtaining the credit rating. Also, it doesn't end there.

Maintenance of the rating continues to take up management effort, the banker said.

In addition, the issuer may not agree with the rating given as it may be in an industry subject to volatility.

"Singapore Airlines is in the aviation industry which is subject to volatility from geopolitical events, forces of nature, pandemics, overcapacity and other factors which may affect financial metrics and performance with follow-through to ratings," said an SIA spokesman.

"It is worthwhile to note that only a very small percentage of airlines are rated, likely for similar reasons."

But he added that SIA would bear the SGD Credit Rating Grant in mind for future consideration.

Explaining further, Bertrand Jabouley, S&P Global Rating director, corporate ratings, said that passenger traffic and pricing can be volatile, and airlines operate in markets in the region where there is also fierce competition.

Typically, an airline makes money in regional currencies while substantial costs and investments are in US dollars, he said. "In practice, airlines' credit quality will typically not be consistent with the highest rating categories, like AAA."

For huge companies such as CapitaLand - one of Asia's largest property players -- it has no problem accessing the bond market with its unrated bonds. CapitaLand has a global portfolio worth more than S$78 billion as at March 31, 2017, comprising integrated developments, shopping malls, serviced residences, offices, homes, real estate investment trusts and funds.

Said a CapitaLand spokesman: "MAS's offer of grant to encourage issuers in the SGD bond market to issue rated bonds is a positive step to further improve market transparency. As for CapitaLand's bonds, our company enjoys a good credit standing as can be seen from the coupon rate of our bonds traded in the secondary market and our cost of funding for the bonds has been competitive.

"In addition, CapitaLand has a diverse footprint across different real estate asset classes. We are of the view that the credit rating criteria for bonds can be more robust to take into account varying business conditions across different industries in different countries."

Singapore property companies operate in an environment where interest rates are low but land costs are very high, and they also face cyclical risks, said Chan Kah Ling, S&P Global Rating director,corporate ratings.

"If a company's debt is very high, its financial ratios look very ugly. Our view on credit quality combines a company's business and numbers," said Ms Chan.

A big company such as CapitaLand would have a stronger business, and would be better able to ride through volatile cycles, she added.

Mapletree said that it has no plans to obtain a credit rating as it does not see any significant benefit from doing so. "Also, we have been able to tap the Singapore dollar debt capital markets and raise funds at competitive levels without a credit rating," said a Mapletree spokeswoman.

"Given that this market is familiar with our  name, we continue to enjoy good support from quality investors. We expect that the Singapore dollar debt capital markets will remain liquid and readily accessible, as an alternative funding source for us."

As at March 31, 2017, Mapletree owns and manages S$39.5 billion of office, retail, logistics, industrial, residential, corporate housing/serviced apartment, and student housing properties.

The fixed income banker pointed out that for now, MAS's good intentions - that credit ratings would allow issuers to attract a broader and more diverse investor base, including international institutional investors - would probably benefit smaller players.

But the SGD bond market is not particularly receptive to new small names, so it will take time before more issuers are convinced to come onboard, even with 100 per cent funding for their credit rating expenses.