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12-05-2013, 09:28 AM
What happens when interest rates start to rise?
The Straits Times
www.straitstimes.com
Published on May 12, 2013
S'pore investors turn to riskier bonds
Persistently low interest rates are forcing buyers to look beyond investment-grade debt
Singapore's yield-starved investors are buying riskier bonds in a move that is allowing many smaller companies to issue debt for the first time, IFR reported.
Auric Pacific Group, best known as the owner of food courts offering cheap meals to Singapore's workers, is set to join a growing number of small and mid-cap companies hoping to appeal to fixed-income investors when it serves up its first offering from a $500 million debt programme.
While Auric's share price has doubled over the past 12 months, its market cap of $161 million makes it one of the smallest companies to try a bond sale. But it is far from the only issuer to spot an opportunity.
Persistently low interest rates in Singapore are forcing investors to look beyond investment-grade bonds, with at least five small and medium-sized enterprises completing local debuts since March.
The five-year benchmark government bond was yielding 0.49 per cent last Thursday, while consumer prices in March were up 3.5 per cent on the previous year.
Oxley Holdings, a mid-cap property developer, provided the latest indication of that hunger for yield last Wednesday with a $150 million, 5.1 per cent bond that attracted orders of more than $1.7 billion.
Hong Fok, another developer, had already offered evidence of the trend. The issuer attracted orders in excess of $320 million for its $120 million, 4.75 per cent debut in March. Raffles Education, another small-cap, has come to market twice this year via an $80 million, 5.8 per cent deal in February and a $50 million, 5.9 per cent offering late last month.
Companies of Oxley's size have traditionally relied on Singapore's bank loan market, while the city's fixed-income investors have tended to prefer rated, investment-grade issues or companies with larger market capitalisations.
The rush of financings from these smaller companies, however, shows that dynamic is changing.
"In a sense, the loan desks are now competing with the debt capital markets desks for business from these small companies," said one loans banker.
Alongside Auric, companies including Tuan Sing Holdings, Nam Cheong and Tat Hong Holdings are gearing up for their first bond sales after setting up medium-term note programmes in the past few weeks. The biggest of those, crane leasing company Tat Hong, has a market cap of US$744 million (S$921 million).
The enthusiastic response to this year's high-yield deals shows that fixed-income buyers are moving down the credit curve in search of higher returns.
While that allows companies to improve their funding flexibility and access a wider investor base, it also raises the risks for the local fund managers and private bank clients who buy the debt.
Singapore bond buyers are more accustomed to studying the credit risk on large, frequent issuers such as the state-backed National University of Singapore, but many of those large-cap companies pre-funded much of their 2013 needs when borrowing rates plunged last year.
Moving down the credit curve comes with an obvious appeal. While Oxley paid 5.1 per cent on its bonds, NUS - one of the few investment-grade issuers in the Singapore dollar market this year - priced a five-year bond in January at a yield of 1.028 per cent.
Meanwhile, the yield on the five-year Singapore government benchmark hit a record low of 0.31 per cent in January and was still below 0.5 per cent last Wednesday. The 10-year benchmark dropped below 1.5 per cent for the first time last year and was at 1.47 per cent last Wednesday, close to last December's record low of 1.29 per cent.
Such low interest rates have made the bond market competitive even against cheap bank debt from Singapore's deposit-rich lenders.
Senior unsecured bonds also offer greater operational flexibility over bank loans, where smaller borrowers are often required to pledge assets as security or collateral against the debt.
"This allows SMEs to diversify not only their funding sources but also the structures of their debt portfolios," said one Singapore-based banker.
The added flexibility has a cost. Small companies pay a premium of some 50 to 100 basis points for the unsecured structures, although bankers argue the benefits of bullet repayments and flexibility outweigh the additional cost. A basis point is equal to 0.01 per cent.
Should interest rates remain near historic lows, Auric is unlikely to be the only one to find hungry investors queueing up for more.
Reuters
The Straits Times
www.straitstimes.com
Published on May 12, 2013
S'pore investors turn to riskier bonds
Persistently low interest rates are forcing buyers to look beyond investment-grade debt
Singapore's yield-starved investors are buying riskier bonds in a move that is allowing many smaller companies to issue debt for the first time, IFR reported.
Auric Pacific Group, best known as the owner of food courts offering cheap meals to Singapore's workers, is set to join a growing number of small and mid-cap companies hoping to appeal to fixed-income investors when it serves up its first offering from a $500 million debt programme.
While Auric's share price has doubled over the past 12 months, its market cap of $161 million makes it one of the smallest companies to try a bond sale. But it is far from the only issuer to spot an opportunity.
Persistently low interest rates in Singapore are forcing investors to look beyond investment-grade bonds, with at least five small and medium-sized enterprises completing local debuts since March.
The five-year benchmark government bond was yielding 0.49 per cent last Thursday, while consumer prices in March were up 3.5 per cent on the previous year.
Oxley Holdings, a mid-cap property developer, provided the latest indication of that hunger for yield last Wednesday with a $150 million, 5.1 per cent bond that attracted orders of more than $1.7 billion.
Hong Fok, another developer, had already offered evidence of the trend. The issuer attracted orders in excess of $320 million for its $120 million, 4.75 per cent debut in March. Raffles Education, another small-cap, has come to market twice this year via an $80 million, 5.8 per cent deal in February and a $50 million, 5.9 per cent offering late last month.
Companies of Oxley's size have traditionally relied on Singapore's bank loan market, while the city's fixed-income investors have tended to prefer rated, investment-grade issues or companies with larger market capitalisations.
The rush of financings from these smaller companies, however, shows that dynamic is changing.
"In a sense, the loan desks are now competing with the debt capital markets desks for business from these small companies," said one loans banker.
Alongside Auric, companies including Tuan Sing Holdings, Nam Cheong and Tat Hong Holdings are gearing up for their first bond sales after setting up medium-term note programmes in the past few weeks. The biggest of those, crane leasing company Tat Hong, has a market cap of US$744 million (S$921 million).
The enthusiastic response to this year's high-yield deals shows that fixed-income buyers are moving down the credit curve in search of higher returns.
While that allows companies to improve their funding flexibility and access a wider investor base, it also raises the risks for the local fund managers and private bank clients who buy the debt.
Singapore bond buyers are more accustomed to studying the credit risk on large, frequent issuers such as the state-backed National University of Singapore, but many of those large-cap companies pre-funded much of their 2013 needs when borrowing rates plunged last year.
Moving down the credit curve comes with an obvious appeal. While Oxley paid 5.1 per cent on its bonds, NUS - one of the few investment-grade issuers in the Singapore dollar market this year - priced a five-year bond in January at a yield of 1.028 per cent.
Meanwhile, the yield on the five-year Singapore government benchmark hit a record low of 0.31 per cent in January and was still below 0.5 per cent last Wednesday. The 10-year benchmark dropped below 1.5 per cent for the first time last year and was at 1.47 per cent last Wednesday, close to last December's record low of 1.29 per cent.
Such low interest rates have made the bond market competitive even against cheap bank debt from Singapore's deposit-rich lenders.
Senior unsecured bonds also offer greater operational flexibility over bank loans, where smaller borrowers are often required to pledge assets as security or collateral against the debt.
"This allows SMEs to diversify not only their funding sources but also the structures of their debt portfolios," said one Singapore-based banker.
The added flexibility has a cost. Small companies pay a premium of some 50 to 100 basis points for the unsecured structures, although bankers argue the benefits of bullet repayments and flexibility outweigh the additional cost. A basis point is equal to 0.01 per cent.
Should interest rates remain near historic lows, Auric is unlikely to be the only one to find hungry investors queueing up for more.
Reuters
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