Neptune bondholders burned as AAA Singapore connection loosens

[SINGAPORE] Neptune Orient Lines bondholders are paying the price for betting they could count on Singapore state backing after a junk-rated French company agreed to take over the shipping firm.

Since state-owned investment company Temasek Holdings Pte last month said it would sell its majority stake in Neptune Orient to CMA CGM SA, notes issued by the container liner lost as much as 13 per cent. Yields on the unrated bonds have surged to more than twice the levels they were first sold at starting in late 2010.

The losses are a fresh blow to an illiquid market already shaken by its first default since 2009 in November. Some of Neptune Orient's notes have clauses that will be triggered by the planned sale, allowing for potential early repayment or compensation. Such change-of-control features are often inserted in debt that benefits from implicit parental support from the likes of Temasek, which has a AAA rating and owns majority stakes in companies with S$6.3 billion of outstanding local bonds.

"The confidence placed in government-owned companies was somewhat over-extended," said Elaine Ngim, head of fixed income for Asia at Coutts, Royal Bank of Scotland Group's private banking unit. "Investors who are looking to invest in these companies should look closer at the covenants of each issue, ensuring they are well protected on the downside should government support be removed." Neptune Orient's 2020 and 2021 notes dropped by 10 to 13 per cent since Temasek said it would exit. They don't offer investors any compensation under a change of ownership. The 2017 and 2019 bonds, which do have clauses allowing new owners to decide on early redemption or paying a higher coupon, lost 1.7 per cent and 9.5 per cent.

The covenants in Neptune Orient's bonds reflect market terms around the time the securities were sold, said Jack Liang, the firm's head of investor relations. CMA CGM, the world's third-largest container shipping group, will look at redemption options "later" as the takeover offer is still pending regulatory reviews, company spokesman Benoit Tournebize said by e-mail. Temasek declined to comment on debt issued by its majority-owned entities.

CMA CGM on Dec 7 offered S$3.4 billion for the Singapore company that's lost money in five of the past six years. Temasek, which has controlled Neptune Orient since 2004, is cashing out as a glut of capacity and declining demand pushes Baltic Dry freight rates to the lowest level since at least 1985.

Lutz Roehmeyer, director of fund management at Landesbank Berlin Investment, which holds the Neptune Orient bonds that have covenants would reduce his holding if the sale goes through as the CMA CGM ownership would breach the fund's investment guidelines.

"We do not like pure corporates, only companies with some kind of a backstop and Temasek fits for us in the bucket of quasi-sovereign," said Mr Roehmeyer. "We would not care about the short-term drop, but if Temasek sells the shares, we would care because that was the reason we bought the bonds." Neptune Orient's bonds appear to be catching up with market reality as their yields surge into junk territory, closer to the debt issued by its suitor. The yield on the Singapore-based liner's 2017 notes has jumped to 7.35 per cent from 5.41 per cent before the takeover offer, according to Bloomberg-compiled prices. Its 2021 notes' yield surged to 11.1 per cent from 7.1 per cent.

CMA CGM's euro-denominated 2021 notes, rated six levels below investment grade by Standard & Poor's and Moody's Investors Service, traded at 84.4 per cent of face value to yield 12 per cent on Thursday.

"I suppose there could've been some view of implicit support from Temasek but that's obviously not going to be there anymore" after the takeover, said Terence Smiyan, the lead analyst at S&P for CMA CGM. "If we were to assign ratings, it's highly likely it would be equalized to CMA CGM, but I'd expect any new debt to be raised at the CMA CGM level." Tan Chong Lee, Temasek's head of portfolio management, said last month the deal would create a leading shipping company and enhance Singapore's position as a maritime hub. The state investment firm sold its controlling stake in Stats ChipPac to a Chinese buyer in October, triggering losses before an automatic redemption of its bonds. The next month the chip maker paid 8.5 per cent to sell US$425 million of notes, almost double the cost of its previous sale in 2013.

"The challenges in places like Singapore are that investors have very little experience dealing with events like takeovers, distressed businesses and the response of parent companies," said Charles Macgregor, head of Asian high-yield research in Singapore at Lucror Analytics. "This means they may misprice credit risk. With more experience, it will get better, albeit slowly."

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