Temasek sells S$1 billion of 10-year bonds

The Singapore dollar-denominated transaction is well received by insurance companies in particular, despite pricing at a tight spread.

Temasek Holdings yesterday raised S$1 billion ($703 million) from the sale of Singapore dollar-denominated 10-year bonds -- its fifth bond sale in just four months. The aggressive capital raising suggests that the Singapore government-owned investment firm is gearing up to make new investments.

In a press release issued in connection with the launch of the bond yesterday morning, Temasek said the proceeds will be used by Temasek and its investment holding companies to fund their ordinary course of business.

A Singapore dollar-denominated, triple-A rated, 10-year liquid benchmark of this size is a rarity, especially outside the banking sector and the deal was well received, despite the recent volatility in global bond markets. According to a source the issue priced inside PSA International, a Singapore-based port operator which is wholly owned by Temasek and served as a key benchmark, and also offered a substantial cost saving for the issuer compared with if it had issued in US dollars. At the same time, though, it offered investors a solid yield pick-up over the underlying government curve.

By choosing its local currency, Temasek also avoided clashing with the multitude of dollar-denominated deals that have been in the market recently. No fewer than nine Asian dollar bonds priced last week despite a tough market environment and two more were on the road. However, India's Bank of Baroda decided to postpone the launch of its planned issue at the end of the roadshow after a sharp widening in the spreads of Indian deals in the secondary market, and Bank of India, which finished its roadshow yesterday, was expected to make the same decision -- to hold off on the launch and wait for calmer market conditions.

The Singapore dollar swap market was relatively stable yesterday morning, however, which suggested there was a window to issue. And Temasek was quick to grab the opportunity. Asian issuers in general are keenly aware that central banks around the region are likely to start raising interest rates at some point this year to ensure the economic recovery doesn't turn into an asset price bubble, which explains their eagerness to lock in funding at today's rates. And Temasek would be no different.

The bonds were indicated at a spread of 40bp-45bp over the Singapore dollar swap offer rate (SOR) immediately at launch and priced at the tight end of that guidance by mid-afternoon. The 10-year bonds carry a coupon of 3.265% and were re-offered at par, resulting in a yield of 3.265% as well.

While the issue was very sizeable for the Singapore market -- it is in fact the largest Singapore-dollar denominated transaction ever aside from the bank and government deals, according to Dealogic data -- investors were likely pleased that the bookrunners clarified already at launch that the deal would not be upsized. Also underpinning the demand, according to the source, was the fact that the yield was fixed above 3.25%, which is a preferred yield target for many of Singapore's insurance companies.  

The total order amount was said to have exceeded S$2 billion and about 55 accounts came into the deal. Given the timing of the transaction, European investors weren't really given a chance to participate and the entire order book was generated out of Asia, with about 85% of the demand coming from Singapore and 15% from the rest of Asia, including some small accounts from the Middle East.

Insurance companies and pension funds were allocated the single largest share of the deal at about 40%, while fund managers were given 26%. Banks took 12%, sovereign-type accounts 11%, and retail investors 8%. The remaining 3% went to corporate investors.

"It was really the long-dated term guys that are looking for absolute yield targets that drove this trade," one banker said, summing up the demand.

While Singapore fixed-income investors tend to be more focused on absolute yields than on spreads, it is when looking at the latter that one can really see what a strong transaction this was for Temasek. Its final spread of SOR plus 40bp compares with a spread of 65bp over for PSA's $500 million 10-year bonds that were issued in September last year. And Temasek's own $1.5 billion 10-year US dollar bond that it sold in mid-October 2009 were quoted at spread over swaps of about 90bp. Translated into a Singapore-dollar trade, that would suggest a spread of about 65bp-70bp, according the same banker.   

In December last year, Temasek sold S$300 million each of 20- and 30-year Singapore-dollar denominated bonds, but both those deals "were tucked away and disappeared", which means they are no good as a comparison. Temasek's new bonds will be available for trading from today.

In addition to the three deals mentioned, Temasek also sold $500 million of US dollar-denominated 30-year bonds in November, bringing its total fundraising in the Asian bond markets in the past four months (including yesterday's deal) to roughly $3.1 billion.

The bonds were issued by Temasek Financial, which is a wholly owned subsidiary of Temasek, but are guaranteed by the parent company. They were sold under Temasek Financial's $10 billion guaranteed global medium-term note programme, which was recently increased from $5 billion to allow for more future issues.

According to a ratings notice by Standard & Poor's issued yesterday, Temasek has earlier issued five bonds under the programme, comprising a total of $4.2 billion.

Temasek is rated AAA by Standard & Poor's and Aaa by Moody's Investors Service. In the eyes of investors this makes it a slightly stronger credit than PSA, which has a split rating of triple-A from Moody's and double-A from S&P.

S&P said its rating for Temasek reflects the issuer's very strong liquidity position, highly diversified and liquid investments with no single investment accounting for more than 17% of the portfolio value and most of the company's major investments having strong business risk profiles. That said, about "one-third of the company's investments are exposed to the financial sector, which adds volatility to the investment portfolio, and its exposure to emerging Asia has grown over the past few years, increasing country, legal and regulatory risk", the rating agency said.

However, given that Temasek is owned by the government, there is a "likelihood of extraordinary support, if needed" from the Singapore government, S&P said.

The deal was jointly arranged by ANZ, DBS, HSBC and Standard Chartered.

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