Investors steer clear of weak corporate bonds as default risks rise

Companies in struggling sectors will likely face refinancing risks in 2020 as investors go for higher-grade corporate bonds.

When Hyflux defaulted on its retail bonds in April, experts initially feared that this will push investors to steer clear of Singapore bonds. Now, investors have continued to pour funds into local bonds, but with a caveat—they are only choosing issuers with strong track records, leaving companies in weaker sectors to scramble for financing.

“The high-yield space continues to feel the effects of weakened investor sentiment. As such, the Singapore wholesale bond market has for the past 12 months been dominated by stronger credits including banks, financial institutions, statutory boards and government-linked corporations,” notes Trevor Chuan, Partner – Capital Markets Practice, WongPartnership LLP.

UOB data show that transaction volume in the Singapore bond market grew 23.7%, amounting to a total issuance of $21.07b from 75 deals. The jump in issuance of local currency corporate bonds was due to large issuances, led by government-owned institutions.

However, investors have grown more selective this year, spooked by a string large-scale defaults and a record amount of maturing debt. “Trend-wise, investors have been more prudent and astute in choosing bonds, and there is an increased demand for tighter covenant terms that would afford bondholders with greater protection. This is likely influenced by a number of notable defaults in recent years and as weaker economic conditions are expected to send more companies into distress,” says Renu Menon, Director for Corporate & Finance, Drew & Napier.

Perpetual securities on the rise
As investors grapple with the current low-yield environment, there has been greater interest in perpetual securities issued by high-grade issuers. Mere weeks after Hyflux’s default, Singapore Press Holdings issued $150m in perpetual securities, with payments pegged at a rate of 4.5% per annum. “In this global low-rate environment, investors are looking for yield. They are willing to go down the capital structure to buy perpetual bonds or increase the holding duration of senior papers,” explains Valerie Lee, Executive Director, Bond Syndicate Asia, Standard Chartered Bank. “We’re also seeing a new lease of life for perpetual bonds, with investor-friendlier structures and issuances by more entrenched names such as ST Telemedia and Frasers Property. Given that investors are looking for yield pick-up, they are willing to go longer in tenor for the high-grade names,” she adds.

“Whilst perpetual securities typically offer higher yields, they are much riskier as there is no obligation by the issuer to repay the principal amount,” explains Edmund Leong, Head of Group Investment Banking, UOB. “Structures such as perpetual securities [appeal to] sophisticated investors with higher risk appetites.”

Even financial institutions have jumped in on the perpetual bonds bandwagon. UOB has issued of $750m 3.58% additional tier-1 perpetual capital securities, marking the first time a Singapore bank has issued additional tier-1 capital that is priced below 4% coupon rate, marking the lowest for this structure in the SGD bond market.

Retail bonds have also fared well, as it is growing in both breadth and depth. “On the retail front, efforts to stimulate the Singapore retail bond market using legislation and innovative products have yielded some notable results,” Chuan says.

Chuan highlights that in the past 12 months, Temasek Holdings became the first issuer to offer retail bonds under the Exempt Bond Issuer Framework. The offering, which included a public offer to retail investors and placement to specified investors, raised a total of $500m with $300m coming from the public offer.

There were also notable issuances from statutory bodies. The Housing & Development Board issued two bonds: a $600m 10-year bond with a coupon of 2.675% and a $500m 7-year bond with a 2.495% coupon. Both issuances are part of its $32b multicurrency medium-term note programme, which aims to finance the company’s development programmes and refinance its existing debts. The Land Transport Authority (LTA) unveiled a 40-year $1.5b offering with a coupon of 3.38%.

The real estate sector dominated the top 30 corporate issuers, accounting for 45.4% of the top 30’s total corporate bonds outstanding at the end of March. This was followed by the transport and finance sectors with market shares of 18.6% and 14.6%, respectively.
Quality issuers dominate deals

“We will see stronger bifurcation between established issuers with very strong credit profiles and everybody else,” warns Hui Choon Yuen, Head – Debt Capital Markets Practice; Partner – Financial Services Regulatory and Private Wealth Practices, WongPartnership LLP. “With the former, there will always be demand for their bond and they will continue to tap the debt capital markets opportunistically and take advantage of good pricing opportunities. For the latter, finding sufficient investor demand at the right price is always the challenge and we do not see that changing any time soon,” he says.

For instance, Hui stated that the retail offerings by SIA, Temasek and Azalea Group were launched in the wake of a high profile default by Hyflux of its retail perpetual securities. “The concern was that such a high profile default would have negatively impacted appetite for retail debt instruments. The strong investor interest shown in the above-mentioned offerings proved otherwise,” he notes.

Lee agrees, and says that the private sector has placed more emphasis on reputable companies. “Whilst private banking liquidity has been strong, private banking investors are more selective about the credits that they invest in and they place greater focus on quality names. Real-estate issuers continue to dominate the issuers profile,” she says.

UOB’s Leong adds that another trend observed this year is the strong investor interest in bank capital issuances from offshore international banks. “Such issuances provide Singapore dollar (SGD) bond investors the ability to diversify their credit portfolios and to achieve better yields relative to other capital instruments from the banks,” he notes.

Moving forward
Experts agree that the outlook for Singapore’s debt capital markets remains positive. More foreign issuers are expected to tap the SGD bond market, and high-grade issuers will continue to enjoy strong interest from investors. “On a balance, the outlook in the Singapore Debt Capital Markets scene continues to look positive as investors may continue to favour the bond market. Quality of the offering remains important, and investment-grade issuers are expected to continue to dominate the market,” Menon says.

“New entries (local and foreign) are anticipated to make their presence known, for instance, as infrastructure bonds gain momentum. Singapore’s Debt Capital Markets scene is expected to play a prominent role in raising finance for development and infrastructure spending in the region,” she adds.
Standard Chartered Bank’s Lee agrees. “The outlook for the debt capital market into 2020 remains robust. We expect the current high activity to continue, and the bond market to continue to grow further with the trend for an increased number of foreign issuers to continue,” she notes.

She added that 2020 will see bond maturities in larger sizes, equivalent to and even greater than $500m from a number of corporates. However, challenges remain in the form of heightened trade tensions and increased interest rate volatility. Leverage has risen while interest cover has fallen – a function of both the rise in absolute leverage and higher interest rates. “As interest rates remain low due to the global uncertainties, issuers, are presented windows of opportunity to tap the bond markets to raise funds at an attractive rate,” Leong comments.