Market perks up for investment-grade Singapore-dollar perpetual bonds

Singapore

COMPANIES are taking advantage of tighter credit spreads and low interest rates to issue perpetual bonds, and industry players say the market demand for these bonds is strong despite some past problems.

Data from DBS as at Sept 17 showed S$5.45 billion had been raised from 17 perp issuances this year, already exceeding the S$1.9 billion raised across 11 deals in 2020.

Singapore-dollar perp issuances dipped last year, said market watchers polled by The Business Times, partly due to lower investment needs amid an uncertain growth outlook. Investors were also increasingly wary of defaults, especially from high-yield issuers.

This year, however, more issuers are using SGD perps to reinforce their capital base and shield themselves against anticipated economic stress, said Clifford Lee, DBS global head of fixed income.

Also known as hybrid bonds, perps can be treated as equity rather than debt on corporate balance sheets. This can be helpful when companies need to watch their leverage levels.

"Issuing perps makes a lot of sense when you need to maintain a certain debt-equity ratio or maintain certain covenants," said Mr Lee of DBS.

The earnings of many issuers were affected last year. This would have meant a weaker growth in capital base than hoped or planned for, added Mr Lee.

In addition, the general credit quality of issuers has improved in 2021, which has led to tighter credit spreads, said Dexter Tan, senior fixed income analyst at iFast Financial's Bondsupermart team.

And the environment has become more favourable for perp issues. TSMP Law partner June Ho called it an "opportune time" to lock in funding before rates start to rise.

Investors, meanwhile, are showing some eagerness for instruments that can return 4-5 per cent.

"Given the dearth of other 'safe' investment opportunities in the still uncertain endemic times, perpetual bonds are attractive as they afford investors a predictable and reliable stream of income, usually at higher interest rates than regular bonds," said Ms Ho.

The amount of money raised in the Singapore market via perps wasrising steadily till last year.

Data provided by DBS to BT last year showed perps as a percentage of bond issues had climbed from 7 per cent in 2014 to 29 per cent in 2019.

As perps have risen in popularity, however, investors have also lately become more aware of the risks of these hybrid instruments.

Yang Eu Jin, partner and co-head of RHTLaw Asia's corporate and capital markets practice, noted that because perps have no fixed maturity date, investors are exposed to the credit risk of the issuer for a prolonged period of time.

Investors can only exit the investment by selling the perps in the secondary market, provided there is sufficient liquidity.

And such liquidity might dry up when the economic environment is weak or the issuer is facing adversity.

Under such circumstances, issuers could also end up deferring payments - leaving investors with limited exit options and no income.

In July, First Real Estate Investment Trust announced that it would not be redeeming a S$60 million tranche of perps on the first call date of July 8.

The perps, which paid 5.68 per cent per annum, were also reset with a new rate of 4.9817 per cent per annum for the next five years - reflecting the relatively lower interest rate environment since they were first issued. The bid for the perp the day before the announcement was half its par value.

Perp holders are also at some disadvantage when a company winds up, as perps are subordinated to senior debt and are not secured. Perp holders are only paid after the senior debts and secured bondholders have been repaid.

This often leaves "not much more in the pot for the perp holders", said Ms Ho of TSMP.

That is the likely outcome for holders of Hyflux's perps. The water treatment company had in 2016 issued perps paying 6 per cent per annum. Hyflux's long association with Singapore's national water infrastructure may have lulled some investors into thinking the perps were safe instruments, but Hyflux is now winding up and there is a possibility that perp holders will get nothing.

Another risk - one that is somewhat lower for older perps but might become more relevant - is the possibility that interest rates may rise such that perp coupons are no longer attractive to investors.

Richmond Zhan, head of fixed income at Phillip Securities, said perps issued in the current market environment would have a lower base interest rate.

This month, Keppel Corporation announced the issue of S$400 million in perps paying 2.9 per cent per annum. And UOB in June issued S$600 million in perps paying 2.55 per cent per annum.

But Mr Zhan noted that some perps do have a step-up feature that increases the interest rate over time if the bond is not redeemed.

Mr Tan of iFast said that rising benchmark yields and SGD swap rates would likely incentivise issuers to call back perps rather than face higher reset rates.

"We think that financing conditions will remain robust while issuers will have stronger balance sheets and better liquidity to redeem their perpetual notes on their respective call dates," said Mr Tan.

Against this backdrop of greater investor awareness and generally lower interest rates, industry players said the market has been strongest for high-quality investment-grade issuers: mostly financial institutions, real estate investment trusts (Reits) and Temasek-linked corporates.

DBS' Mr Lee noted Singtel's maiden perp issue in April of S$1 billion of subordinated perps at 3.3 per cent. Subscriptions received came to S$2.1 billion.

"For strong investment-grade names like that, you will have participation not just from the private banks, but also from institutions," said Mr Lee.

TSMP's Ms Ho is anticipating more perp issuances from the real estate sector.

"With the real estate segment in Singapore reporting strong growth, one would expect fundraising activity in that sector to boom," said Ms Ho, adding that there has been a lot of action among the Reits despite challenging conditions in the sector as a result of Covid-19 pessimism surrounding the commercial and retail space.