Sing-dollar perps flying off the shelf as prices surge

NEW bond issues in particular perpetuals have flown off the shelf as yield-hungry private bank clients swarm back into the local bond market.

Two recent deals saw order books more than two times oversubscribed on pent-up demand.

French bank Societe Generale's S$750 million issue on April 9 saw demand for S$1.55 billion, allowing the perps to be priced at 6.125 per cent, tightened from the initial 6.5 per cent guidance.

Out of the order book, about 85 per cent were from Singapore clients, while 15 per cent were from international investors, said DBS Bank, one of the banks which handled the sale. Private banks took up 81 per cent of the deal, followed by fund managers with 11 per cent and bank and corporate investors at 8 per cent.

SocGen's issue, the third perp transaction so far this year, issued at 100, has already risen to 100.589.

The week before, Frasers Property sold S$400 million of 4.98 per cent perps under its S$5 billion multicurrency programme.

The transaction had an initial price guidance of 5.25 per cent and received strong demand from investors, quickly building an orderbook that was more than two times oversubscribed. The positive reception allowed the issuer to tighten the coupon rate by 27 basis points while still exceeding its initial deal size expectations.

OCBC Bank was the sole lead manager and bookrunner for the transaction, and has lead-managed every Frasers Property bond transaction (across nine deals) on a sole-led basis since 2016.

Tan Kee Phong, OCBC Bank head of capital markets said the Singapore dollar bond market has gathered momentum in recent weeks, with primary issuance volumes and prices in secondary trading both gaining investors' attention of late.

The momentum continued on Monday with ARA Asset Management's S$100 million 4.15 per cent 5-year bond taking in orders in excess of S$300 million. The initial price guidance was 4.375 per cent.

The Markit SGD corporates total-return index has been hitting new highs practically daily over a month now; it rose to 127.6216 on April 11 before easing to 127.5926 on April 12, according to Bloomberg. It is up 2 per cent since the start of the year.

Year-to-date total SGD bond issuance volume has increased some 7.3 per cent to S$7.4 billion.

The price of the first perp issue in 2019, ST Telemedia's S$350 million 5 per cent has soared; sold in January it hit a high of 104.410 on April 11. It was off slightly to 104.373 on April 12.

STT is wholly owned by Temasek Holdings.

"After a lull at the beginning of the year, primary issuances recovered towards the end of 1Q19 and issuance volumes year-to-date have now exceeded the corresponding figure at this point last year," said Mr Tan.

The positive tone in fixed income markets can be attributed to several factors, he said.

"First, increasingly dovish signals from the US Federal Reserve have tempered market expectations of the rate hike trajectory ahead, with the market even pricing in the possibility of rate cuts moving forward.

"This has further stoked risk-on market sentiment. Coupled with the ample liquidity in the market chasing for yield and relative scarcity of quality issues in the SGD space at the beginning of the year, this has led to credit spreads tightening for both investment-grade and high-yield issues," said Mr Tan.

Investors are hot for perps because these hybrid bonds generally pay higher coupons due to their duration risk, said Clifford Lee, DBS Bank head of fixed income.

Perps have no maturity though most are sold with a call date, which is when the issuer has the right, but not the obligation to redeem the bonds. All the three perp deals sold so far have a call date in their fifth year.

Mr Lee also noted that expectations that interest rates will remain low or even trend lower is driving investors to buy the bonds as they can borrow cheaply.

"The cost of leverage for private bank clients will remain low and make this an attractive asset class," said Mr Lee. Investors have a lot of cash to deploy, he said.

In the previous two years over S$10.5 billion worth of perps was redeemed against issuance worth S$9.6 billion.

Amid slowing economic growth, investors may want to exercise some caution as perps are relatively more risky than straightforward bonds. Perps issued by banks can be converted into equity in the event of financial distress.

Last week, the International Monetary Fund (IMF) lowered its global growth outlook, its third downgrade since October. The IMF said the global economy will likely grow 3.3 per cent this year, the slowest expansion since 2016. The forecast cut 0.2 percentage point from the IMF's outlook in January.

Global growth is set to slow in the foreseeable future and "in this environment, careful credit selection is key to investment performance in the credit markets," said Ang Chung Yuh, iFast senior fixed income analyst.

SocGen and Frasers Property largely are large issuers with decent credit metrics, said Mr Ang.

"Having said that, it is still important for investors to understand the terms and conditions of such hybrid securities as well as the extension risk involved, before putting down their money."