Monday, 20 May 2019

Changing appetites

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  • Changing appetites

While the Dim Sum market is likely to remain top dog, the Singapore dollar market is snapping at its heels. Both onshore and offshore money are taking advantage of low interest rates and a strong currency.

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The renminbi market remains the local currency market for Asia. Issuance volumes in the renminbi fixed-income market in the year-to-date already stand at Rmb125bn (US$19.7bn) versus a whole year of Rmb150bn in 2011, according to Barclays.

“This year renminbi issuance is going to exceed last year’s level. The second quarter was a record quarter in the market,” said Jon Pratt, head of Asia-Pacific DCM for Barclays in Hong Kong.

But there is a slight sense that Dim Sum issuance is yesterday’s news.

It is not just that bankers have become ardent neophiles. There are some solid reasons behind it. With a renminbi appreciating about 4% a year against the US dollar last year, even low yields were an investment no-brainer thanks to the currency pick-up. That all changed in mid-March when China’s Premier Wen Jiabao pointed out that the renminbi was close to its “equilibrium value” against the US dollar.

Weak economic data have also plagued the China story this year. Industrial companies’ profits in the first seven months of the year dropped 2.7% to Rmb2.7trn, according to the National Bureau of Statistics. That adds to the 2.2% drop in the first half versus a hefty 28.3% gain in the same period last year. The Shanghai Composite hit a 41-month low at the end of August.

Is the gloom overblown? Probably. “The lack of appreciation in the renminbi is temporary – there is no permanent structural change,” said Ashley Davies, Asia senior economist/FX strategist at Commerzbank in Singapore. “And it would be a mistake to extrapolate that for years on end.”

Belle of the ball

Nonetheless, if the excitement surrounding the Dim Sum market has waned slightly, the Singapore dollar bond market is keen to step up to the plate. Bond issuance this year has been remarkable. Last year saw bond sales of S$19.7bn (US$15.7bn). This year’s volumes already stand at S$23.1bn. James Fielder, head of local currency syndicate, Asia, global markets, for HSBC said: “The Singapore dollar market is on fire this year.”

Why is the Singapore dollar market the current belle of the ball? First is its safe-haven status. Singapore’s coveted Triple A rating is only one of three in Asia. Second are the low benchmark rates. The five-year government benchmark rate is currently sitting at 0.41%, while the 10-year is 1.41%, only 7bp above Bunds and 11bp inside Gilts. At the same time as low interest rates, the Singapore dollar remains strong. August saw a low of 1.239 against the US dollar, though it settled around the 1.25 mark – up 3.5% on the year. That makes a basis swap trade incredibly attractive. All of that, combined with the continued growth in private banking in Singapore means there is a great deal of money looking for yield.

“There is a lot of capital aggregated in Singapore in the private wealth community. That community is looking at bonds instead of equity,” said one Asian DCM banker.

The demand for Singaporean paper has continued consistently through the year and the story of the year has been the massive oversubscription for paper. In mid-August, Singapore’s National Trades Union Congress and the only insurance co-operative in Singapore, sold a S$600m 15-year non-call 10 via DBS, Citigroup and Standard Chartered. The 3.65% notes saw orders of more than S$9bn.

A couple of weeks later, property developer GuocoLand saw a S$2.35bn order book for its S$105m five-year deal. Both beat Genting Singapore, which owns one of Singapore’s two multibillion-dollar casino complexes, which in March sold a jaw-dropping S$1.8bn 5.125% perpetual issue, the largest ever single-tranche issue in the Singapore dollar market, with S$6bn orders.

Also spurred on by a deliberately low interest rate environment that is likely to remain in place for the foreseeable future thanks to the threats of inflation (although figures from the Singapore Department of Statistics show that inflation stood at 4% in July, that is the lowest level for 20 months) issuers have been able to sell bonds at much longer tenors than usual.

Although the size was not massive, in July, shopping centre developer CapitaMalls printed a S$150m 12-year deal. What was especially significant was that it carries only a coupon of 3.75%, the same level that 10-year paper was pricing for the previous month. But the trend continues downwards. In early September telecoms StarHub saw its S$220m 10-year paper price at 3.08% – the lowest 10-year coupon ever for a corporate issuer in Singapore.

Offshore comfort

But the market has not just seen domestic issuance. The volume of bond sales from offshore issuers has risen dramatically this year too. Even at the end of February it was clear that offshore money was getting comfortable.

To illustrate, in the whole of 2011, only five borrowers from Hong Kong raised S$2.6bn in 11 tranches according to Thomson Reuters data. That in itself was a significant rise on the S$375m raised in 2010. In the first two months of this year, they raised S$660m. And there has been no let up. Singapore has even seen a high-yield offshore issuer. In April investment holding company Central China Real Estate priced an increased S$175m five-year bond at 10.75%. Not only was that inside initial price talk, it was at least 300bp inside the company’s US dollar 2015s, which were then trading at 13.25%.

This year has seen offshore issuance of S$5.7bn year-to-date according to Barclays which already comfortably beats 2010 volumes of S$5.5bn.

Perhaps the most noteworthy deal appeared at the end of August, when Mumbai-headquartered IDBI Bank deliberately chose to sell a S$250m 3.65% three-year bond at a time when a number of its rivals were going cap in hand to the more traditional US dollar market.

Not only did IBDI Bank achieve the norm of a massive book, of S$3bn, but its paper priced inside its rivals and then performed better in secondary. Indian rival Axis Bank sold a US$250m tap of its 5.125% September 2017s the same day. Those bonds remained stuck at the reoffer spread, while IDBI enjoyed a small bump and was being quoted at 100.25/100.50 in the secondary market.

This deal showed it is natural for Indian borrowers to find a healthy reception in the Singaporean market thanks to the greater brand recognition among Singaporean investors and the high numbers of Indian wealthy offshore residents in Singapore. And that is all before the currency is taken into consideration.

“Some Indian companies are in a better position to raise money in Singapore dollars and swap into US dollars at more attractive levels than issuing in the US dollar market directly,” said Pratt.

Beyond private wealth

The question on bankers’ minds is whether enthusiasm for Singapore issuance can continue and whether the Singapore market can grow outside the private wealth community. Although cautious, many believe so. The perennial complaint about a lack of liquidity in the market has eased considerably over the past year.

More to the point, the pipeline looks steady. One Asian syndicate head said he had about 30 names looking at renminbi issuance. With Singapore dollar issuance it is not like that. “There is a quick turnaround of announcement, roadshow and then bang,” he says.

A number of domestic issuers like SBS Transit and SMRT Corp, both domestic transport operators in Singapore, have indicated that they intend to tap the market. More to the point, in the tailwind of VTB Bank’s S$400m 4% three-year deal in July, Sberbank, Russia’s banking behemoth, is rumoured to debut in the Singapore market via BNP Paribas and Standard Chartered in the near future.

Indeed estimates are S$2bn–S$3bn of total issuance of Singapore dollars by the end of the year.

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