Bond Express commentary: Perpetual bonds staged a comeback as investors hunt for higher yields

• Credit Suisse’s perpetual bonds rebounded strongly after the bank revealed that their exposure to Russia remains well-managed. The Group maintains a healthy solvency profile despite the spill over effects from the Archegos and Greensill collapse in 2021.
• Cathay Pacific Airways Ltd saw an increase in demand for its SGD bond following the Hong Kong government’s announcement to ease some of their Covid-19 restrictions such as lifting their flight ban from nine countries. This provides a positive backdrop for the flagship carrier going forward as the Group looks to resume its flight operations.
• Country Garden Holdings Co Ltd stood out among the rest of the Chinese property developers as the company managed to publish its full-year audited financial results. Net gearing ratio fell by 10.2 percentage points (“ppt”) while its solvency and liquidity profile still remain strong despite the Chinese property market turbulence.
• ESR Cayman Ltd reported their full-year 2021 results on 24 March 2022. Total profit and adjusted EBITDA for the year improved notably, while net gearing and current ratio still remain manageable despite worsening slightly compared to a year ago. We think that the recent buying interest in the ESRCAY 5.650% Perpetual Corp (SGD) could be due to the Group’s positive 2021 results coupled with the high probability of the issuer redeeming the perpetual bond due to the 200-basis points step-up in 2026.
• The demand for STSP 3.300% Perpetual Corp (SGD) could be a sign of investors looking for stable income options amidst the rising fears of recession due to the bear flattening and inversion of Treasury yield curve.

Table 1: Top 5 traded bonds on SG Bond Express for March

Credit Suisse Group AG

Credit Suisse’s perpetual bonds staged a strong rebound after revealing that its exposure to Russia remains well-managed with appropriate systems in place to address the geopolitical risks. The Swiss bank has stopped pursuing new businesses in Russia and looks to reduce its exposure to the country. However, Credit Suisse still remains bogged down by the Archegos and Greensill collapse last year, as the bank recently revealed that litigation for the latter could take around five years and some investors may not be able to recover their money. For FY2022, the Group said that it will be a transition year for the bank as they will look to reallocate capital towards core businesses and generate structural cost savings to invest for growth. These initiatives will likely look to materialize from 2023 onwards.

Nevertheless, Credit Suisse still maintains a strong solvency profile with a CET1 ratio of 14.4% as at 31 December 2021. Liquidity coverage ratio and net stable funding ratio are at 203% and 127% respectively at the end of last year, which are well above the regulatory requirements. We think that the recent buying interest in the CS 5.625% Perpetual Corp (SGD) is due to the short remaining time to its first call date on 6 June 2024, as well as the high probability of it being redeemed by the issuer. The perp will be reset based on the 5-year SGD swap offer rate (“SOR”) plus 376.7 bps, and looking at the indicative 5-year SOR at the time of writing this article, the coupon reset will be ~6.250%, which is already higher than the current coupon of 5.625%.

Cathay Pacific Airways Ltd

Cathay Pacific Airways Ltd saw an increase in buying activity for its SGD bond following the Hong Kong government’s plans to ease some of their Covid-19 restrictions in April. A ban on flights from nine countries including Australia, Britain, Canada, France and the United States will be lifted from 1 April. Meanwhile, hotel quarantine for Hong Kong residents arriving back into the country will also be reduced from 14 days to 7 days if they tested negative. We believe that this provides a positive backdrop for the Hong Kong carrier, as the government looks to shift away from a zero-covid policy after businesses were left feeling the brunt of the tough virus restrictions.

As at 5 April 2022, the SGD bond is trading at 98.82 with a yield to maturity of ~4.89%. The Group’s current liquidity position remains healthy with HKD 30.3b of available unrestricted liquidity, which is more than sufficient to cover HKD 22.4b of short-term borrowings as at the end of last year. As such, we believe that the buying interest in the CATHAY 3.375% 22Jan2023 Corp (SGD) largely stems from the short duration of the bond as investors can look to earn a decent yield to maturity and subsequently redeploy their capital following the maturity of the bond early next year.

Country Garden Holdings Co Ltd

The COGARD 6.500% 08Apr2024 Corp (USD) rebounded ~25.7% for the week ended 1 April 2022 due to a positive sentiment surrounding the Chinese real estate market and the company’s success in announcing its 2021 annual results. Unlike some other property developers like China Evergrande Group who were not able to file their 2021 financial results, or only able to announce unaudited results before the HKEX regulatory deadline, Country Garden Holdings Co Ltd managed to publish its audited full year financial results ending 31 December 2021 (“FY21”) on 30 March 2022. This boosted the market’s confidence in the authenticity of the Group’s financial result.

Country Garden Holdings Co Ltd reported a net profit of CNY 26.8b for 2021, while revenue for the year grew 13% to CNY 523.1b. Its net gearing ratio improved substantially from 55.6% as at 31 December 2020 to 45.4% as at the end of last year. Notably, its non-restricted and non-regulatory cash to short-term debt remains healthy at 1.3x, demonstrating the Group’s strong short-term liquidity and repayment ability. Its weighted average borrowing costs also declined by 36 bps to 5.2%. The Group continues to maintain its industry leading position in sales, showing its operational resilience amidst the property market turbulence. Investors who are interested in Country Garden may read our credit update here.

ESR Cayman Ltd

ESR Cayman Ltd reported its 2021 financial results on 24 March 2022. Total profit for the year grew by 21.6% year-on-year (“YoY”) to USD 382.7m, while adjusted EBITDA also improved 16.3% YoY to USD 430.8m. Despite its current ratio declining from 1.85x in 2020 to 1.21x in 2021, the Group’s cash and bank balances still remains more than sufficient to cover its short-term borrowings, thus, its liquidity position still remains healthy as at 31 December 2021. Net debt-to-total asset ratio increased from 23.2% in 2020 to 27.9% in 2021 as a result of higher total borrowings which increased 28.9% YoY. ESR Cayman Ltd remains disciplined in managing its capital, as it lowered its weighted average interest cost from 4.6% in 2020 to 4.1% as at 31 December 2021.

We think that the recent demand for the ESRCAY 5.650% Perpetual Corp (SGD) is attributable to its positive 2021 financial results, coupled with the high probability of the perp being called in March 2026. The perp has a step-up margin of 200 bps from March 2026 if the issuer decides not to redeem the bond. Hence, this incentivizes the issuer to call the bond, otherwise, the coupon will be reset at a much higher rate compared to its current distribution rate. As such, investors looking to earn higher returns might turn to the ESRCAY 5.650% Perpetual Corp (SGD) that is currently yielding at ~5.6% yield to next call with around 3.9 years left. For more information, investors can refer to our latest article on the ESR Cayman Ltd.

Singapore Telecommunications Limited

The recent buying interest in the STSP 3.300% Perpetual Corp (SGD) could be due to investors looking for stable income options amidst the rising recession fears due to the bear flattening and inversion of the Treasury yield curve in recent weeks, as well as the geopolitical tensions between Russia and Ukraine. The perpetual bond is rated BBB by S&P, while Singapore Telecommunications Limited (“Singtel”) is 52.2% owned by Temasek Holdings as of June 2021. The Group has a strong credit profile, with a net gearing ratio of 29.0% as at 30 September 2021 (30 September 2020: 32.1%), while interest coverage ratio stood at 14.8x (30 September 2020: 13.3x), demonstrating its strong interest servicing ability. Going forward, Singtel hopes to grow its core operations through increased 5G adoption and rollout of commercial services while leveraging on the rapid digitalization trend.

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Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) holds a position in CS 5.625% Perpetual Corp (SGD), CATHAY 3.375% 22Jan2023 Corp (SGD), COGARD 6.500% 08Apr2024 Corp (USD), ESRCAY 5.650% Perpetual Corp (SGD) and STSP 3.300% Perpetual Corp (SGD), and the analyst who produced this report hold a NIL position in the abovementioned securities.

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