Signs of life

IFR Asia - South East Asia 2015
10 min read
Kit Yin Boey

After a stuttering start, local corporate bond markets in Singapore and Malaysia are showing signs of a rebound, and bankers and analysts believe issuance volumes in 2015 will grow year on year.

South-East Asia’s largest domestic corporate bond markets have taken a long time to get going in 2015, with new issues in Singapore and Malaysia running at the slowest pace in years.

It is not for want of trying as bankers in Singapore have been busy bringing potential issuers to meet fixed-income investors, but a wide gap in pricing expectations and growing concerns over high-yield, energy-related credits have kept new deals at bay.

Issuance volume in the first two months of this year for both countries were only around 32% of what was sold in the same period last year.

Market participants have blamed the unimpressive start on rising global volatility, with interest rate hikes looming in the US, China’s growth slowing and commodity prices under pressure.

“This slowdown is seen in many of the local markets in Asia, not just in Singapore,” said one debt banker. “Just look at the offshore renminbi market, which is far bigger and more liquid than that in Singapore and is just as sluggish. The more open the local market, the more affected it is on the global volatility.”

Dim Sum bond sales slumped almost 70% year on year in January and February was the slowest month for new issues since August 2013. More Asian issuers are tapping the US dollar markets before rates go up, while lower euro funding costs have also been tempting.

However, signs in the last couple of weeks have given South-East Asian bankers reason to be optimistic. A handful of deals are getting done in Singapore.

“The general tone is firming,” said Clifford Lee, head of fixed income at DBS Bank.

“Issuers and investors are coming to terms with pricing expectations and that gap is narrowing. This is reflected in the number of issues that have been sold in the market in recent weeks and have traded up in the secondary markets.”

Resilient ringgit

Falling oil prices have dragged Malaysia’s currency down against the US dollar, but bankers say the local market has held steady.

“We expect the ringgit debt market to remain resilient despite a more volatile global environment,” said Chu Kok Wei, group head, treasury & markets at CIMB Group. “The high savings rate and relatively high yield of ringgit securities will provide a good cushion against the backdrop of a possible US Fed-led rate hike cycle.”

The ringgit market has also weathered the storm around Malaysia’s exposure to falling oil prices, as well as the uncertain future of cash-strapped sovereign wealth fund 1MDB.

The government has broached the possibility of dismantling 1MDB and selling its assets to resolve its debt issue – a bold step that can restore confidence in Malaysia’s finances.

Initial fears that 1MDB’s delayed repayment of a bank loan of M$2bn (US$541.8m) would badly hurt Malayan Banking and RHB dissipated after the facility was repaid on February 13. The two banks’ combined exposure to the company now stands at M$3.5bn, only around 0.6% of their aggregate total loans.

Malaysia’s ringgit has lost 17% against the US dollar in the past six months, but overseas demand for local investments has remained steady. Foreign holdings of Malaysian Government securities edged slightly higher to M$145.3bn in December, and bankers expect the country’s relatively high yields to maintain its international appeal.

“Foreign holdings of Malaysian government bonds have been stable during this whole period of declining ringgit value, which is primarily due to the strengthening US dollar. As central banks in the developed world turn to quantitative easing, Malaysian yields are becoming more attractive,” said Chu at CIMB.

“Volatility is expected to be higher in 2015, but we expect Malaysia’s strong financial infrastructure to absorb this well. The country’s economic fundamentals are strong, with its high savings rate, good FX reserve cover and plenty of domestic uninvested money.”

Down the credit curve

As such, bankers and analysts believe corporate bond issuance volume in 2015 will increase from last year’s M$67bn. Hong Leong Bank has forecast full-year volumes of M$75bn–$80bn, while local rating agency Marc is more optimistic with its prediction of M$80bn–$90bn.

Investors are expected to continue to chase yields, a trend that picked up strength last year.

Marc chief economist Nor Zahidi Alias noted sales of bonds rated Single A and below rose nearly fourfold to M$3.9bn in 2014 from M$1.1bn in 2013, an extraordinary reversal of a 31% drop per annum on a compound annual growth rate basis since the global financial crisis in 2007.

One factor driving the move down the credit curve is a significant narrowing in the gap between Triple A and Double A rated bonds, pushing investors chasing higher yields into Single A credits and below.

That has also pushed investors into unchartered realms of unrated and perpetual bonds, allowing companies like Malaysia Airports Holdings and DRB Hicom to sell hybrid issues at the end of last year. MAH sold Asia’s first subordinated perpetual sukuk and Malaysia’s first rated corporate perpetual sukuk in a M$1bn 5.75% perp, callable after 10 years, in early December.

That appetite for higher-yielding assets was also at play when the Malaysian Government announced regulations in June to remove rating requirements. The move is in part a clear recognition that the debt market has surpassed equities market as the key fundraising venue in the country.

March could see more issuance in Malaysia as there will be some M$4.97bn of ringgit corporate bonds and sukuk coming due – the largest monthly amount this year. Fresh supplies are already expected to come this year from state-owned Dana Infra, Cagamas, Bank Muamalat, DRB Hicom and a number of infrastructure projects.

Yield hunt returns

In Singapore, a selloff in bonds resulting from tumbling crude oil prices in December left many investors sitting on paper losses. Although market sentiment has since stabilised, several bonds are still in the red.

“Liquidity is so bad in the secondary market that they are just stuck with the bonds,” said one Singapore-dollar bond trader. “They will just have to wait out the weak market conditions.”

Much of the loss-making paper is from issuers in the oil-and-gas industry, with the most badly hit being offshore oil services provider Swiber Group and subsidiary Vallianz.

Although crude oil prices appear to have stabilised, albeit at low levels, there is still a lack of confidence in oil-and-gas-related issuers. Swiber’s stock has plunged over 70% in the past 12months, while its S$50m (US$36m) 6.25% due 2017 was quoted at a cash price of around 82.00 with a yield of around 13%, while Vallianz’ S$60m 7.25% due 2016 was quoted at around 87.75, or a15% yield.

Since the December rout in its notes, Swiber has announced new contracts to bump up its order book to US$1.4bn as at end-February. It has met fixed-income investors, assuring them that it will be able to meet its bond obligations of S$95m this year and that it was working on cost savings.

“I will have to wait for more numbers further in the year before I can regain full confidence,” said one investor after one such meeting. “Still, it is less gloom and doom than I had expected at the company.”

That sliver of hope is also reflected in the gradual return of investors to the bond markets, although instead of pursuing junk bonds, investors are turning to perpetual issues that provide them the yields from quality issuers.

Frasers Centrepoint sold a perpetual non-call five 5.0% issue on March 2 amounting to S$700m, a chunky deal at a time when issuance is at a low. It garnered a book of S$1.5bn, which bankers said comprised little fluff and showed a hunger for yields.

Just a month earlier, Indonesian real-estate developer Ciputra Property successfully priced a S$65m three-year bond to yield 5.625%. The Ciputra bonds were quoted around 101.00 in early March.

Bankers believe the Singapore dollar market will regain its equilibrium later this year. Local banks have big pipelines of deals in store and continue to search for windows.

“I still think issuance volume in Singapore will grow about 20% for this year,” said one DCM head.

“Issuers are still looking to access the market, but there are still headwinds to negotiate – the uncertain Fed rate hike, the economic slowdown in China, the slowdown in Singapore’s economy, and the external political tensions in Russia. Once these issues have settled, the market will be back to functioning normally.”

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Signs of life