THE SINGAPORE BOND market went into a minor swoon last week on news that oilfield service company Swiber Holdings was to go into receivership. A liquidity crisis at the company, which is facing a raft of notices of demand, effectively left its senior management no viable choice but to go into liquidation.
This news was something of a shock given that the company had redeemed almost S$200m (US$148m) of debt over the past two months – proving that in the world of debt restructuring, ability to repay can be a false flag in the face of spiralling contingent liabilities.
But it would be as well not to draw conclusions about Singapore’s overall credit outlook on the back of what represents a lesson in the vagaries of idiosyncratic risk.
It’s no surprise against a prolonged period of slumping oil prices that an ancillary company in the sector should face debt service problems as the result of severely constrained cashflow.
Of course it’s not great news either for holders of Singapore dollar-denominated debt from Swiber’s sector, with around S$1.2bn (US$890m) of paper due to be redeemed over the next next 18 months, much of it less than liquid.
DEBT HOLDERS ARE faced with the classic dilemma that presents itself as a commodity-dependent sector goes down the tubes. Do they wait in the hope that the price of the underlying commodity bounces significantly and cashflow picks up? Do they get out at a sharply discounted price in an illiquid, panicked market? Or do they hold out to see what they can achieve assuming an orderly liquidation?
We are watching this pan out in Indonesia in the ongoing Berau Coal restructuring, which involves US$950m of offshore debt. It’s a similar situation, involving a liquidity squeeze based on the shift south of coal prices which has made full debt service impossible. One of the alternatives on the table as a term sheet is thrashed out is rumoured to be a calibrated coupon which would ratchet up along with the spot price of coal.
Unlike the case with Swiber, liquidation has not yet been mooted at Berau but, by comparison, you’d wonder whether the Swiber situation could be better addressed with a terming out and a haircut of existing debt with coupons linked to shipping charter rates for oil transportation rather than full liquidation.
The wobble in the Singapore bond market prompted by Swiber’s announcement came in the slipstream of nearly a dozen companies in the city-state seeking to loosen covenants on outstanding bonds. The mood was already leery.
Personally I regard it as a classic buying opportunity given my view, expressed in this column a few weeks back, that the country’s domestic bond market is a prime candidate for a lurch towards negative yields.
Price action in the Singapore government bond market at 10 years has this year been stunning: nominal yields stand at 1.8%, having rallied 80bp so far in 2016 and 11bp over the course of July. Hong Kong, which resembles the Singapore macroeconomic landscape, has seen its 10-year government bonds trade at just 0.99%, for a near-60bp yield compression in the first seven months of the year. Negative yields can’t be far off in the SAR.
The global quest for yield, preferably without going soft on credit quality, has been responsible for driving almost a third of the world’s debt stock into negative interest rate territory.
What could be a more tempting target in this enterprise than Singapore’s government bond market, which is rated Triple A and meets the Basel III liquidity coverage criteria, and moreover where headline inflation just fell for 20 months in a row?
As far as Swiber is concerned, in terms of sound business practice and the avoidance of moral hazard, it’s something of a sharpener to see that no Singapore government bailout is on the cards for the company.
One wonders how a similar situation would have panned out in Malaysia, where government largesse has often been present, most notably five years ago when real estate developer Ranhill received government guarantees after its biggest asset – a housing development in Libya – became unviable.
THE BIGGER QUESTION is whether we are witnessing simply another arc of the global commodity cycle – one which will see poorly capitalised enterprises such as Swiber go to the wall, and more sturdy competitors ride the cycle through – or the secular decline of the fossil fuel industry, with all the pain that is bound to accompany it.
The heady oxygen supply for the commodity super-cycle has been all but choked off by China’s cooling economy, and it is difficult to see it turning around with anything like full price recovery.
It’s easy to see how powerful players in the traditional industrial complex balk at ideas such as the COP21 climate change agreement signed last December in Paris, which aims to reduce global greenhouse gas emissions.
Donald Trump has no truck with that agreement and aims instead to reinvigorate the flagging American coal industry, should he become president. And Rodrigo Duterte, newly installed president of the Philippines, has recently stated that he won’t honour the country’s carbon emissions agreement signed by his predecessor Benigno Aquino.
All is well and good in the quest for economic growth rooted in heavy industry. One problem: where’s the global growth that will fuel it?
