New SGD issuance slightly weaker year-on-year
As of end-May 17, primary market issuance in the SGD corporate bond market (including re-openings) amounted to S$10.99b, representing a -4.8% decline from the year-ago period (Jan-May 16) where S$11.55b of new SGD bond issues were announced. This S$10.99b came from 42 issuers spanning 49 bond issues; issuers which tapped the SGD bond market more than once this year (via different issues) include F&N Treasury Pte Ltd, Frasers Commercial Trust, Frasers Centrepoint Trust, Guocoland, HDB as well as Mapletree Treasury.
Despite the weaker year-on-year issuance, we note that higher yield issuers have returned to the SGD bond market this year (after a very dry spell in 2H 16; investors may recall that the LMRTSP 7.000% Perpetual Corp (SGD) was one of the rare HY issues to be launched in that period), a suggestion that investor sentiment is turning for the better after a wave of oil & gas sector defaults in 2016.
Top performing New SGD Bonds in 2017
As of 31 May 17, new SGD bonds (which were announced this year) have delivered a 0.6% average price appreciation (since launch, excluding accrued interest), suggesting that investors in new bond issues have generally been rewarded with capital gains so far in 2017. Returns have primarily been driven by the declines in domestic SGD rates so far in 2017 – using the 5Y SGD Swap Offer Rate as a guide (the average maturity/call for new SGD issues so far in 2017 was 4.8 years, while the weighted average maturity/call was 5.75 years), the rate has declined 59.5bps (see Chart 1) on a year-to-date basis, helping to drive returns for longer-dated SGD bonds. Consequently, the best-performing new SGD bond issues are those which are more interest rate sensitive, and have thus benefitted from the declines in benchmark rates so far in 2017.
Chart 1: Rates declining YTD
New SGD bond issues which outperformed so far in 2017:
Commerzbank AG's 4.875% Tier 2 10NC5 2027s (+4.6% price return)
Germany's second largest bank tapped the SGD bond market with their maiden Basel III-compliant Tier 2 (10NC5) issue in February (see Commerzbank AG looking to issue Tier 2 SGD bonds), launching S$500m of CMZB 4.875% 01Mar2027 Corp (SGD)s to resounding demand from investors. The bonds were announced with an initial price guidance of 5.25%, before a strong order book (~S$4b) allowed the issuer to tighten pricing down to 4.875%. The bonds (which are rated BBB-/BBB by S&P and Fitch respectively) are currently quoted at around 104.60, offering a yield-to-call of 3.8%.
BNP Paribas' 3.65% senior non-preferred 2024s (+3.8% price return)
In a first for the SGD bond market, BNP Paribas announced a senior "non-preferred" long 7Y (7.5 year tenor) SGD issue in February, raising S$250m via the BNP 3.650% 09Sep2024 Corp (SGD)s. As we've described in BNP Paribas SGD Long 7YR Senior Non Preferred Notes at 3.875% Price Guidance, the bonds are a newly-created debt category which seeks to facilitate the implementation of bank resolution procedures in France; while senior in rank, the BNP 3.650% 09Sep2024 Corp (SGD)s rank junior to the bank's existing senior unsecured debt (these are now known as "senior preferred"), effectively splitting senior borrowings into a more senior "preferred" segment, and a subordinated "non-preferred" segment. Rating agencies differ in their treatment of this new senior non-preferred category – S&P rates the bonds one notch below the issuer rating (A- versus A), while Fitch accords the bonds the same rating as the issuer (A+). Orderbooks were reportedly in excess of S$500m for the eventual S$250m issue, resulting in a tightening of pricing from 3.875% (initial guidance) to 3.65%, but the bonds have continued to outperform given the decline in domestic SGD rates so far this year and are currently offered at around 104 (3.03% YTM).
Mapletree Treasury's 4.5% Perp NC5s (+3.4% price return)
Mapletree Treasury's MAPLSP 4.500% Perpetual Qsov (SGD) was the first new SGD bond issue announced in 2017 (see Mapletree Investments: New SGD perpetual bonds at 4.7% price guidance), with the wholly-owned Temasek entity raising S$625m from bond investors in a Perp NC5 structure. This is a similar structure to Mapletree's existing MAPLSP 5.125% Perpetual Qsov (SGD)s (as well as Sembcorp's SCISP 4.750% Perpetual Corp (SGD)s and SCISP 5.000% Perpetual Corp (SGD)s) – the bonds are callable after 5 years but the coupon only resets after 10 years (with a 1% coupon step-up). Orderbooks were around the S$800m mark (pricing tightened from 4.7% to 4.5%), but despite the sizable amount raised, investor appetite remains strong for Mapletree's bonds, with the issuer tapping the bond market a second time this year in May, launching a S$700m MAPLSP 3.950% Perpetual Qsov (SGD) (Perp NC5.5) issue. Both the MAPLSP 4.500% Perpetual Qsov (SGD)s and MAPLSP 3.950% Perpetual Qsov (SGD)s are currently quoted at similar yield-to-call levels of 3.63% and 3.84% respectively.
UOB's 3.5% Tier 2 12NC7s 2029s (+2.3% price return)
United Overseas Bank launched a 12NC7 issue to resounding investor demand in February, raising S$750m at 3.5% (UOBSP 3.500% 27Feb2029 Corp (SGD)s). Given the familiarity with the name coupled with the strong bond credit rating (A3/A+ by Moody's/Fitch), orderbooks were reportedly in excess of S$1.8b for the eventual S$750m issue – pricing tightened from initial guidance of 3.75% (see UOB Ltd to issue new Tier 2 SGD-denominated 12NC7 bonds at 3.75% indicative) to settle at 3.5%, although further domestic rate declines this year means the issue is now quoted at a YTC of around 3%.
HDB's 2.2325% 2022s (1.7% price return)
The Housing and Development Board tapped the market for a new 5Y bond issue in February, raising S$900m via the issuance of HDBSP 2.2325% 21Feb2022 Qsov (SGD)s. At 2.2325%, this was marginally above the prevailing 5Y SGD SOR (2.165%), although the issue still offered a 58bps spread over the prevailing 5Y SGS yield (perhaps a more appropriate risk-free benchmark rate for comparison). At current ask quotes of around 101.91, this is a 1.8% YTM, or just 22bps over the current 5Y SGS yield, so returns for the HDBSP 2.2325% 21Feb2022 Qsov (SGD)s have been driven by a combination of benchmark yield declines as well as some spread tightening. The HDB, by far the largest "corporate" issuer in the SGD corporate bond market, took advantage of the decline in benchmark rates so far in 2017 to launch a second bond issue, the HDBSP 2.350% 25May2027 Qsov (SGD), raising a further S$500m in a 10Y bond issue (with a marginally higher coupon than the 5Y issue).This second issue was priced at just 24.5bps over the 10Y SGS, representing a much tighter spread versus the HDBSP 2.2325% 21Feb2022 Qsov (SGD)s.
Strategy going forward
For investors, picking up new issues has been a fairly lucrative strategy so far in 2017, but investors should note that returns have been aided by the decline in benchmark rates (amidst a weakening of the USD vis-à-vis the SGD). We've observed that higher-yielding issuers are starting to return to the market in a sign of increasing confidence, while we think that hybrid structures will continue to be a popular mode of issuance (to satisfy investor appetites for higher yields while also easing balance sheet stress as well as to meet regulatory requirements, in the case of bank subordinated debt). As per our earlier expectations (New Issues Update: SGD bond market off to a slow start, busy month for China developers), we think SGD bond issuance activity is likely to accelerate in the second half of this year, given the ongoing need to refinance a sizable amount of maturing debt.
Given where benchmark rates stand today, betting on further yield declines may not be the most appropriate strategy in the new issue market at this juncture. We think investors should continue to look towards attractively-priced credit opportunities in the new issue market (particularly in the case of smaller issuers or first-time issuers which may have to provide a larger new issue premium to entice buyers), as well as selected hybrid opportunities (subordinated debt structures) which can provide higher-yielding exposure to better-financed mid- or larger-sized issuers.
