Here is your all-in-one 2022 outlook for SGD bonds

• Monetary policy is set to tighten in 2022 and bond issuances may be lower compared to previous years.

• However, most issuers maintain a strong credit profile and we have listed the list of 2022 bonds in Appendix 1.

• Many of them are still investable, but we prefer the short-term, higher-yielding names.

2021 has come to a close and market observers, polled by Bloomberg, predicted that the US 10-year Treasury yield will end 2022 at around 1.85%, up from its current level of 1.54% on 30 December 2021.

Bloomberg poll participants also predicted that WTI crude will end 2022 at USD 74 per barrel (close to USD 72 per barrel at the time of the survey) while the S&P 500 Index is projected to rise slightly to 4,701 (time of survey: around 4636). In general, survey participants expressed less certainty about the stock index and oil price, but were nevertheless more confident about the direction of 10-year US Treasury yields in 2022.

In the same poll by Bloomberg, some 700 respondents cited inflation, coronavirus and geopolitical risks as the largest headwinds for 2022. On the geopolitical front, the main examples given were the tensions between China and Taiwan, as well as between Russia and Ukraine. News about a new Omicron variant recently surfaced that may result in further supply chain disruptions and cause consumer prices to remain at a heightened level.

To address widespread inflationary concerns, the US Federal Reserve indicated that it may conduct three interest rate hikes in 2022. At the recent December 2021 FOMC meeting, the median Fed funds rate was projected to increase to 0.90% in 2022 and 1.60% in 2023, up from 0.30% and 1.00% respectively at the September 2021 meeting (see Figure 1).

Figure 1: Projections of median Fed funds rate in 2022 and 2023

A higher Fed funds rate may imply higher 5-year US Treasury yields and elevated 5-year SGD Swap Offer Rates. The SGD Swap Offer Rate (“SOR”) is a function of short term USD rates (i.e. the Secured Overnight Financing Rate) and it has a strong historical correlation with US Treasury yields (Figure 2).

Figure 2: 5-year SGD Swap Offer Rate and 5-year US Treasury yields

Using Bloomberg estimates, the 5-year SGD SOR may climb to 1.75% in a 25bps rate hike, or increase to as high as 2.25% if rates jump by 75 basis points (“bps”). (Figure 3).

Figure 3: Implied SGD rates in different rate hike scenarios

The Monetary Authority of Singapore (“MAS”) is also likely to tighten monetary policy in 2022. Recent economic data suggest that the economy is growing at a faster rate. Total exports in November increased 31.3% year-on-year (“YoY”) while consumer prices rose at a faster than expected pace of 3.8% YoY in the same month (Figure 4).

MAS expects consumer prices to increase by 1.5% to 2.5% in 2022. This means that inflation may fall from its current 3.8% YoY level as private transport inflation is projected to moderate next year due to a slower pace of increase in COE premiums and petrol costs. Some economists said that the inflation outlook depends on the spread of the Omicron variant as renewed lockdowns would dampen the demand for commodities and inflation.

Figure 4: Recent Singapore economic data

Moving on to bond issuances, Bloomberg estimated that SGD 25.2b of SGD bonds were issued in 2021 and this exceeded pre-pandemic levels. Most issuers rushed to refinance their borrowings at low interest rates. However, the number of bond IPOs reached a new multi-year low of 80 (Figure 5).

Figure 5: SGD bond issuances by year

With monetary policy set to tighten in future and the possible start of a rate hike cycle, we may see more bond offerings in the first few months of 2022. Issuers would want to take the opportunity to refinance their debts at low interest rates. With interest rates set to rise in the later part of the year, the amount of issuances and number of deals may fall.

Figure 6: Number of issued SGD perpetual bonds by year

On a separate point, demand for perpetual bonds have been quite popular with SGD investors. In 2021, 18 SGD perpetual bonds were issued, and this represents the highest issuance over the last few years (Figure 6). The rise in perpetual bond issues coincided with a falling 5-year SGD Swap Offer Rate. However, perpetual issuances may fall in 2022 if swap rates increase. This is because issuers may not want to pay such high distributions to perpetual noteholders. For instance in 2016, we saw only 7 perp IPOs while the 5-year SOR was trading around 2.39%. In 2018, only 10 perps were issued when the 5-year SOR was around 1.91%.

Outlook on bonds maturing in 2022

Given the higher interest rate outlook and hawkish rhetoric from central banks, we are less optimistic about SGD bonds heading into 2022 than at the start of 2021. Longer duration bonds will be susceptible to higher interest rates and investors may see volatility in their bond portfolios. We think some issuers may not redeem their perpetual notes or pay down their bonds on their maturity dates.

In Appendix 1 below, we list down a financial snapshot of issuers whose bonds are maturing or callable in 2022. The cash flows, liquidity and short term financial obligations of each issuer is displayed in tables 1, 2 and 3. Generally speaking, issuers with cash flows and a large enough cash position should have sufficient liquidity to redeem their bonds.

Most issuers will redeem their bonds on their call dates or maturities. However, we are cautious on only a handful of bonds from issuers with high gearing and poor credit quality.

Issuers with low credit quality

Among them, we think the AUSGSP 7.000% 03Dec2022 Corp (SGD), GSHSP 5.200% 21Oct2022 Corp (SGD), MSFSSP 6.350% 22Jul2022 Corp (SGD) and ASPSP 6.000% 01Jul2022 Corp (SGD) have a low likelihood of being paid.

More specifically, these issuers are small companies that are not within our coverage or we have expressed a negative view in the past. In the article - “Aspial Corporation Ltd: here is our quick take on the proposed note exchange offer ”, we highlighted the issuer’s weak credit profile. Aspial Corporation is the parent entity of Maxi-Cash Financial Services and we believe that the MSFSSP 6.350% 22Jul2022 Corp (SGD) and ASPSP 6.000% 01Jul2022 Corp (SGD) have high refinancing risks.

To elaborate further, Maxi-Cash has a low level of cash relative to its SGD 230.21m of short-term debt as at 30 June 2021 (see Table 2 in Appendix 1). Its repayment ability hinges on senior creditors as the bulk of the group’s borrowings are secured by corporate guarantees by the company, as well as fixed and floating charges on all assets of all assets of certain subsidiaries.

We are also cautious on the GSHSP 5.200% 21Oct2022 Corp (SGD) issued by GSH Corporation Limited. The issuer had SGD 54.56m of cash at 30 June 2021, but we suspect a portion of this amount is pledged as security to obtain credit facilities. At the end of 2020, GSH disclosed that SGD 30.18m of the SGD 81.67m cash and cash equivalents were made up of pledged deposits. Of the SGD 72.05m of current borrowings in June 2021, SGD 16.60m are loans from a shareholder. GSH raised SGD 78.0 from a recent rights offering but had already utilised SGD 44.7m of the proceeds. Overall, we feel that GSH would have difficulty paying the October 2022 bonds.

Ausgroup defaulted on the AUSGSP 7.000% 03Dec2022 Corp (SGD) in 2016 and we believe that the firm may restructure the bonds ahead of its maturity given its present low level of liquidity.

Within the SGD perpetual space, we think that First REIT, and Lippo Malls Indonesia Retail Trust may not call back their perpetual notes on their call dates in 2022.

Lippo Malls Indonesia Retail Trust (“LMIRT”) is unlikely to redeem the LMRTSP 6.4751% Perpetual Corp (SGD) in March 2022 but may redeem either of the 2 perps during the second half of the year. The LMRTSP 6.4751% Perpetual Corp (SGD) was not called on its first call date on 27 September 2021, and the distribution rate subsequently declined from 7% to 6.4751%. Moving forward, LMIRT will pay SGD 9.07m of distributions to LMRTSP 6.4751% perpetual bondholders per year.

This amount is more than the SGD 7.92m of distribution expense stemming from the SGD 120m LMRTSP 6.600% Perpetual Corp (SGD). If there is only enough liquidity to redeem either of the 2 perps, LMIRT will likely redeem the LMRTSP 6.6% perpetual notes on 19 December 2022 as they have a lower distribution expense compared to the LMRTSP 6.4751% perps. However, if the 5-year SGD Swap Offer Rate (“SOR”) rises to 2.80%, the issuer will be indifferent towards either perp. Currently, the 5-year SOR is trading at 1.45% (29 December 2021), so we require a few rate hikes from the Federal Reserve in order for the 5-year SOR to reach 2.80%.

First REIT is due to pay down a SGD 100m secured bank loan maturing in May 2022. Its SGD 36.61m cash position is insufficient to cover short-term borrowings, and is not likely to call back the FIRTSP 4.9817% Perpetual Corp (SGD) in January or July 2022.

Issuers with good credit profiles

At the other end of the spectrum, we think that investors may consider investing in some of the higher yielding names. In our opinion, the ARTSP 3.070% Perpetual Corp (SGD), FPLSP 3.950% Perpetual Corp (SGD), WINGTA 4.080% Perpetual Corp (SGD) and ARASP 5.200% Perpetual Corp (SGD) have high call probabilities and are fairly priced.

Figure 7: Relative valuation of bonds maturing or callable in a year

If Ascott Residence Trust does not redeem the ARTSP 3.07% notes on 30 June 2022, the bonds still have an attractive yield to next call of 5.35% and 4.60% at their call dates of 31 December 2022 and 30 June 2023 respectively. These valuations are quite appealing for a ‘BBB-’ (Fitch) rated entity.

Ascott Residence Trust has access to SGD 1.13b of available funds as at 30 September 2021, an amount that is more than enough to cover its SGD 774.0m of borrowings due in 2022. More countries have reopened their borders and we expect EBITDA to gradually improve moving forward.

WINGTA 4.08% Perpetual Corp (SGD), issued by Wing Tai Holdings Ltd has a decent valuation. The issuer may use its ~SGD 728.06m of liquidity to pay down its SGD 150.86m of short-term debt and SGD 150m perpetual note. Similarly, the FPLSP 3.950% Perpetual Corp (SGD) is likely to be redeemed as the issuer has access to SGD 3.00b of credit lines and SGD ~3.78b of cash. Lastly, with a cash position of USD 544.33m, ARA Asset Management has adequate capital to redeem the SGD 300m ARASP 5.200% Perpetual Corp (SGD).

Although, it may sound counterintuitive to recommend perpetual notes when interest rates are projected to rise. However, the aforementioned 4 issuers have a high credit ability to redeem their perpetual bonds in 2022. Secondly, referring to Table 1, the reset reference rates for the FPLSP 3.950% Perpetual Corp (SGD) and WINGTA 4.080% Perpetual Corp (SGD) are already trading close to their coupon rates. The reset reference rate may rise on higher interest rates and this provides an incentive for issuers to call back their perpetual notes. As for the ARTSP 3.07% and ARASP 5.2% perps, we think that the yields are still attractive at more than 5% even if the notes are not redeemed.

Table 1: SGD Perpetual bonds

Appendix 1

Table 2: Non-bank SGD securities callable or maturing in 2022

Table 3: Other non-bank SGD securities callable or maturing in 2022

Table 4: Bank SGD perpetual notes callable in 2022