BE Commentary: Perpetual bonds continue to garner interest from BE investors

• We expect the LMRTSP 6.600% Perpetual Corp (SGD) to not call their outstanding perpetual bond on its call date and reset at a higher rate than its current coupon rate. 

• Straits Trading Company has a healthy balance sheet with strong operating income from its property and resources segment and its 2025 and 2026 bonds are trading at more attractive levels as compared to other diversified property developers.

• We believe the FPLSP 4.980% Perpetual Corp (SGD) will be redeemed on its call date on 11 Apr 2024 as benchmark rates continue to rise. The 100 basis points step up margin would highly incentivise FPL to call back the notes due to the higher reset rate. 

• We continue to hold a positive view on SUNSP as we expect a stronger rebound in retail traffic from the easing of restrictions in Singapore.

• UBS Group AG (“UBS”) reported its best net profit number for a first quarter result since 2007.  

The month of May saw investors favouring perpetual bonds as investors seek higher yields during the current period of high inflation and rising interest rates. Some perpetual bonds are trading below its par value and may be a good entry point for investors to diversify their portfolio with bonds.

Table 1: Top traded bonds on SG Bond Express for May

Lippo Malls Indonesia Retail Trust

Lippo Malls Indonesia Trust (“LMIRT”) announced its first quarter results ending 31 March 2022 (“1Q22”) on 29 April 2022. Gross revenues increased by 16.7% year-on-year (“YoY”) to SGD 50.9m while rental revenue increased by 15.2% YoY to SGD 30.5m. As Indonesia eases Covid-19 restrictions, lower rental or service charge discounts were given to tenants, resulting in higher revenues. Net property income rose by 21.3% YoY to SGD 31.3m. Portfolio occupancy rates for LMIRT continue to remain above industry average at 79.1% as compared to the industry average of 76.7%. The LMRTSP 6.600% Perpetual Corp (SGD) faces extension risk as reflected in the bond’s price but there is a higher probability of call for the LMRTSP 6.6% notes as compared to the LMRTSP 6.4751% Perpetual Corp (SGD) due to its smaller outstanding amount and higher reset rate. We expect the reset rate to be higher than its current coupon rate. As reference, the 5Y SOR on 6 Jun 2022 was 2.855%, this would result in the current reset rate (if the bonds were to reset at the time of writing this article) to be ~7.61%. 

Investors who are interested may refer to our latest credit update on LMIRT – “Will LMIRT bonds outperform its stock in 2022?”.

The Straits Trading Company

The Straits Trading Company (“STC”) bonds were newly onboarded onto Bond Express in April and saw significant investor interest for its STRTR 4.100% 04May2026 Corp (SGD).

For the full year ended 31 December 2021 (“FY21”), total revenue increased by 28.4% year-on-year (“YoY”) on the back of stronger performances for its real estate and resources segment. The Group posted a record high EBITDA of SGD 401m in FY21, which was approximately 3 times higher as compared to an EBITDA of SGD 133.8m in the previous financial year. 

The Group still maintains a healthy net debt-to-total equity ratio of 0.47x (0.51x if adjusted for non-controlling interests) as of 31 December 2021. Current ratio stood at 0.93x as at the end of last year, but we do note that the Group had received SGD 134.8m of cash consideration from the sales transaction of ARA Asset Management in January this year. Furthermore, STC has recently raised funds by issuing a 4-year senior debt with a total size of SGD 170m.

STC has a healthy balance sheet with strong operating income from its property and resources segment. Currently, its 2025 and 2026 bonds are trading at more attractive levels as compared to other diversified property developers, and between the 2 bonds, we think that the 2026 bond offers more value. Investors may refer to our latest credit update on STC for more information.

Frasers Property Limited

Frasers Property Limited (“FPL”) released their financial results for its first half year ended 31 March 2022 (“1HFY22”) on 12 May 2022. Revenue for the group improved by 7.5% year-on-year to SGD 1.68b while profit before interest and tax (“PBIT”) was SGD 526.1m. During the last financial year, FPL reclassified a portfolio of industrial and logistics properties from properties held for sale to investment properties, and because of this, PBIT fell by 37.1% in 1HFY22. However, if we were to adjust for this accounting reclassification, PBIT would have increased by 9.9% in 1HFY22. As at 31 March 2022, the Group’s residential pipeline is in excess of 18,000 units while pre-sales from its project reached SGD 2.4b at the end of 1HFY22.

We believe the FPLSP 4.980% Perpetual Corp (SGD) will be redeemed on its call date on 11 Apr 2024 as benchmark rates continue to rise. Additionally, the FPLSP 4.98% bonds has a 100 basis points step up margin which would highly incentivise FPL to call back the notes due to the higher reset rate. 

Suntec Real Estate Investment Trust

For the financial year ended 31 December 2021 (“FY21”), Suntec REIT (“SUNSP”) saw gross revenues increasing 13.5% year-on-year (“YOY”) to SGD 358.1m. The increase in gross revenues was due to new contributions from The Minster Building acquired on 28 July 2021. SUNSP also reported higher contributions from 477 Collins Street and 21 Harris Street increased in FY21.

SUNSP’s retail performance was strong in 2H21 with tenant sales and shopper traffic picking up especially towards the fourth quarter of 2021. Retail traffic picked up at the end of 2021 as restrictions eased in Singapore as well as the holiday seasonality for retail during the festive Christmas period.

We continue to hold a positive view on SUNSP as we expect a stronger rebound in retail traffic from the easing of restrictions in Singapore. Although rental reversions are expected to be weak, overall occupancy rate still remained stable and higher retail traffic will support revenue from gross turnover rents. One headwind for SUNSP would be its conventions segment as the MICE industry will continue to be impacted by the lack of business events and travel.

Investors may refer to our latest credit update on SUNSP for more information.

UBS Group AG

UBS Group AG (“UBS”) reported its best net profit number for a first quarter result since 2007.  Net profit increased by 17% to USD 2.1b while profit before tax fell 7% to USD 1.3b as businesses in APAC declined.

Speaking on its Russian exposures, the group stated that they have been actively reducing its Russian exposures. Currently, UBS has 0.4b of direct country exposure and its exposures resulted in an impact of USD 100m on its P&L. The USD 100m of impact were write downs or provisions on derivatives and settlements that were impacted from the sanctions.

In terms of solvency, Common Equity Tier 1 (“CET1”) ratio for UBS was 14.3%, a decrease of 0.7 percentage points quarter-on-quarter (“QoQ”). The decrease was due to an increase in risk-weighted assets as asset size increased for the quarter. Liquidity coverage ratio (“LCR”) remains above regulatory requirements at 160%.

Investors may refer to our latest credit update on UBS for more information.

About Bond Express

Bond Express is an initiative that allows you to trade a selected list of wholesale bonds with firm executable pricing and volumes, but more importantly, in lot sizes from as little as USD5,000 for USD-denominated wholesale bonds (or SGD 5,000, USD 5,000, MYR 5,000 for their respective denominated bonds). Click here to find out more about Bond Express. 

Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) holds a position in LMRTSP 6.600% Perpetual Corp (SGD), STRTR 4.100% 04May2026 Corp (SGD), STRTR 3.750% 29Oct2025 Corp (SGD), FPLSP 4.980% Perpetual Corp (SGD), SUNSP 3.800% Perpetual Corp (SGD) and UBS 5.875% Perpetual Corp (SGD) and the analyst who produced this report hold a NIL position in the abovementioned securities.

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