Rise in sub-debt issuance raises questions for Singapore corporates

Singapore''s corporate bond market has gone quiet with investors showing a preference for bank sub-debt.
Following an excellent first half of the year in the Singapore corporate bond market, with many borrowers taking the opportunity to issue in a favorable environment of low interest rates, the market seems to have dried up temporarily.

The dearth of issuance cannot be explained by the cost of issuing bonds increasing in recent months: interest rates remain low; certainly low enough to encourage corporates to hit the market.

Instead, the situation is more a result of two demand-related trends. Firstly, the recent growth in the amount of subordinated debt issued by banks offers investors attractive yields relative to that of corporate bonds and, secondly, there is growing evidence that suggests Singaporean investors are becoming more circumspect when it comes to the corporate bond market.

On the first point, the one thing that does seem to be exciting bond investors presently is UOB's sub-debt deal ù currently being presented to buyers ù which will form part of the bank's plans to buy out one of its competitors, OUB.

The transaction, which could raise up to S$1 billion ($570 million), is being lead managed by JPMorgan, Merrill Lynch, and UOB Asia and follows on from a similar offering from OCBC, which launched a $2.14 billion three tranche offering to buy Keppel Capital, with the major tranche being in Singapore dollars, and breaking local records.

George Lee, head of capital markets at OCBC, believes that investors are more likely to be attracted to such deals from highly rated companies than those from normal Singaporean corporates, many of whom are unrated.

"Bank subordinated debt yields 5% for 10 years, whereas unrated mortgage-backed corporate bonds are yielding 4% or below for up to five year maturity," Lee explains. "That is why the corporate bond market has gone dead."

It is also true to say that investors are going to be a lot more careful for the rest of the year, having put a lot on their books earlier on, so corporate bonds are going to have to offer more attractive returns if the market is going to pick up again.

"From what I can see, there is still a lot of demand for Sing-dollar securities, but investors are becoming more selective with regards to which level they are willing to buy bonds," says Warren Mar, head of fixed income research at BNP Paribas. "In addition, there was a lot of issuance earlier in the year relative to previous years, so there is a feeling that the bond market has been saturated to a degree."

Quite what the Monetary Authority of Singapore (MAS) makes of the situation is anyone's guess. On the one hand, it has been keen to encourage consolidation in the banking industry and the recent sub-debt issuance has helped Singapore to move towards this.

On the other hand, the MAS has actively promoted the corporate bond sector for a number of years and thus will not be encouraged by the slowdown in issuance.

In truth, the MAS should be encouraged that the sub-debt market has crowded out, temporarily at least, corporate issuance because the situation has brought to light one of the less impressive aspects of the Singapore bond market: the way deals are priced.

Unlike most developed markets which use the bookbuilding method to price deals ù which involves the lead managers presenting the deal to investors, seeing the level of interest and pricing accordingly ù the Singapore market has evolved differently.

Instead, you have a situation where a company will go to a relatively number of potential arrangers, let them know what level they want the deal to price at and then let the banks fight it out for the mandate. Singaporean companies know that if banks want the business they will have to meet the demand of their client. The issuer wins and there is little transparency to show what factors are behind the level of pricing.

In the current climate, which favors the investor, not the issuer, potential borrowers wishing to get deals done will have be more in tune with market forces. This could have a positive effect on the market.

Both OCBC and UOB's bank sub-debt deal are being launched as bookbuilt transactions, in line with international best practice.

"I think that a situation of more realistic pricing is coming to the Singapore bond market,' says Mar. "We are seeing that investors are getting more choice, which leads to more competition and, in turn, pricing will become more transparent."