Hyflux, Singapore’s largest water treatment company by market value, has closed a S$175 million (US$140 million) perpetual bond, the first Singapore dollar-denominated perpetual in more than three months and the company’s second this year.
Investor appetite for perpetual bonds, or fixed-income instruments with no maturity, has waned due to increasing competition from plain vanilla notes, which have mushroomed from last year’s year-to-date volume and are able to offer investors decent return.
According to Dealogic data, there has been S$13 billion worth of Singapore dollar-denominated plain vanilla bonds so far this year, a 44.4% increase from last year’s S$9 billion during the same period.
The volume is sizable compared to the Lion City’s perpetual market, which has only seen three Singapore dollar-denominated transactions or a volume of S$600 million year-to-date, with the last one being Malaysian financial institution Hong Leong Group’s S$100 million note in April. This is less than last year’s S$1 billion with two deals during the same period, according to Dealogic.
“There are still some interesting deals in the plain vanilla space that are giving pretty decent yield,” a Singapore-based syndicate banker said to FinanceAsia. “If there’s less supply in the market overall, then investors would be able to focus more on perpetual bonds, but I’m confident the demand will come back as the market continues to mature.”
Perpetual bonds typically pay more than those with a set maturity to compensate investors for the risk the notes will not ever mature and therefore be paid back by the company. They’re generally honoured before equity in the event of a default and such equity-related features mean the securities can lower a company’s debt-to-equity ratio.
Hyflux’s offering has a fixed yield of 4.8% for the first two years and resets every two years thereafter at the Singapore dollar two-year swap-offer rate plus an initial credit spread of 414.8bp and a step-up margin of 200bp, according to a term sheet seen by FinanceAsia.
Some of the new plain vanilla issuances that have come to the market of late can offer investors comparable returns. For example, Singapore-based commodities trader Olam International raised a S$400 million five-year fixed-rate bond on July 15 that pays a coupon of 4.25%.
Hyflux’s Reg S-registered perpetual bond, which is callable in year two, obtained an order book of S$350 million from 30 accounts, the majority of which were private banks. The domestic investor base subscribed to 80% of the company’s notes, while the rest went to the rest of Asia, according to a source familiar with the matter.
Although the increase in competition from the vanilla space has dampened investor appetite for Hyflux’s offering, sources close to the transaction said perpetual notes still attract a select investor base looking to gain yield from credible issuers.
“The perpetual bond market is certainly open for this type of credit,” a source told FinanceAsia. “For the more advance private banking clients, name recognition is very important and Hyflux is a household name.”
Proceeds of Hyflux’s new bond will be used for investment, general working capital and corporate purposes, which may include the repayment of existing borrowings, according to the term sheet.
In January, the company sold a S$250 million perpetual bond callable in year three, which was used as a comparable for the new offering. The January perpetual note was trading at a cash price of 102 prior to announcement, or at an I-spread — spread over the Singapore dollar swap-offer rate — of 404bp, which translates into a new issue concession of 10bp, according to a source familiar with the matter.
In secondary markets, Hyflux’s new note continues to trade around par, the source added.
Credit Suisse is the sole bookrunner of the transaction.