Temasek's February sale of S$1 billion worth of bonds may turn out to be the benchmark issue for investment-grade issuers looking to access the Singapore local currency market. This is because it proved to investors and issuers that the market could match size and tenor of bonds sold in G3 currencies, but at a cheaper price. The market last facilitated a deal of this size back in May 2008, when DBS self-led the sale of its own S$1.5 billion hybrid tier-1 notes. Therefore, the Temasek deal was also a reminder of what the local Singapore market is capable of issuing.
Given that the spotlight is back on Singapore, FinanceAsia spoke with Clifford Lee, head of fixed income at DBS, for some colour on the market fundamentals.
Can you provide a historical context to the Singapore local currency bond market?
Before 2008 deals were mostly being done amongst a smaller group of investors that drove the terms with the rest of the smaller buyers. The average size of the deals being issued was between S$200 million to S$400 million, with the smaller side of the scale being the norm.
The main criticisms of the market was that first, it was not deep enough to accommodate size; second, the tenor was limited -- averaging around the five-year maturity; and third, there was very little secondary-market trading due to the smaller group of investors on every transaction.
All these traits were very typical of a bond issue in the early stages of a developing bond market.
How was the local market impacted by the recent global financial crisis?
Prior to the Lehman collapse, liquidity in the local market started to build up and interest rates became very low. This enabled DBS to issue our own S$1.5 billion hybrid tier-1 issue back in 2008, which sold within a few hours in an accelerated book-build process with close to S$2 billion in real orders.
The deal attracted more than 70 investors, with ample secondary trading thereafter. It was the largest single-tranche Singapore dollar issue to date and the first deal to resemble a proper book-building bond transaction in the developed markets. Naturally with such a landmark deal, it encouraged a lot more investors to the market.
More Singapore banks followed suite, including Malayan Banking with its S$600 million hybrid tier-1 deal (July 2008). The more typical US dollar issuers began to access the local currency market as it was able to accommodate size and tenor at a price cheaper than what they could get offshore.
Then the Lehman crisis happened and everyone took a step back.
By then the market had a taste for what the local bond market could offer and despite the crisis engagement continued.
Throughout 2009 the US dollar market remained volatile and the Singapore dollar market stayed cash flushed. This resulted in secondary market liquidity for benchmark issues and a growing investor base. Hence, more offshore investors looked to buy into Singapore dollar bonds as well.
So far, Temasek is the landmark issue for the local market this year. How has this helped improve investor perspective of the Singapore dollar bond market?
During 2009 there was a steady stream of longer-tenor issues being priced, which was capped off nicely with the 20- and 30-year issues by Temasek in December 2009.
Temasek is the premier name in the local market and was an ideal issuer to help develop the Singapore dollar market. The client was forward-looking and decisive during the process, which resulted in the S$1 billion 10-year benchmark issue in February of this year.
Since the sale of the 2020s, the market has seen very healthy liquidity averaging between S$15 to S$20 million dollars a day, which is quite strong with spreads continuing to tighten.
Because of that we have more enquiries now from debut issuers in the local bond market. What is also helping first-time issuers look to bonds is that the current market is able to accommodate these longer dated and cheaper rate deals than direct bank funding.
The continued low-interest rate environment also means that there's rapidly increasing attention coming in from the private banks for long term fixed income papers.
What the market is experiencing is a return to the circa 2008 days, where the issuers that had traditionally turned to the US dollar market were now looking to issue Singapore dollar notes. With benchmark issues like Temasek paving the way, this has made it even more apparent to them.
What types of investors are currently being drawn to the market?
Looking back two to three years ago, the big investors were mainly limited to the usual asset managers, insurance companies and banks that may have looked to bonds as being loan substitutes.
But now with more interest and activity in the markets, potential and current investors are starting to consider Singapore dollar bonds as real tradable instruments. In addition to this we are beginning to see participation from offshore funds, more bank trading desks, and private banks across the region coming to access the Singapore market.
Historically, the investors that had looked at bonds with 10- to 15-year tenors would have needed the assurance that there would be a healthy secondary market for them to trade out of the security if needed. With the added liquidity in the secondary market the assurance is there and consequently there is now a broader participation from a greater pool of investors in local currency deals.
Will the market this year be favouring private or public placements?
This year the market should be open to more public transactions and we hope to bring more of that to the market. The usual reverse inquiries and private placements will of course continue.
What is the prospect for new issuance for the rest of the year?
The fact remains that we have quite a healthy level of liquidity onshore, which has been exacerbated by the recent crisis. This is because Singapore is increasingly becoming more of a safe haven for investors and the Singapore dollar a safe haven currency.
The market favours high grade and more experienced issuers that can tap the longer-term market. Any other issuers with a less familiar name and lower rating would find it tough to issue and, if issued, to have a bond that would perform adequately in the secondary market.
Doing high-yield issues across the Asian domestic bond markets will continue to be a challenge because of general risk aversion that had set in during the Asian financial crisis. These sentiments are yet to fade away.
This year we're hoping to see more public deals and at the same time there will be an effort to develop a retail bond market. It will expose a bond issuer to the bigger base of retail investors, but that will also require a more extensive level of disclosure.
What's in the pipeline for DBS?
Currently in the DBS pipeline are transactions with longer tenors for very strong issuers. We intend to bring these out to the market in true bond-style execution to ensure proper pricing, participation and allocation, and ultimately better secondary market performance of these bonds.
There is presently no shortage of demand for the right kind of issuers and we're working hard to get good supply into the market.
