En bloc fever may help boost lacklustre Singdollar bond market

Singapore property developers in need of funding to pay for land and en bloc deals could announce more bonds in coming months

Tue, Mar 13, 2018

Siow Li Sen


THE en bloc fever of 2017 may help uplift the lacklustre Singdollar bond market which has been hit by interest rate volatility though strong issuers continue to get their deals done.

On Monday, the Land Transport Authority of Singapore sold a bumper S$1.2 billion worth of bonds, comprising two tranches, a 10-year S$300 million and 30-year S$900 million bonds at 2.75 per cent and 3.35 per cent respectively.

Generally, the bond market continues to be choppy but strong issuers such as the LTA will be well-received, said Clifford Lee, DBS Bank head of fixed income.

Property developers pay for their land and en bloc deals typically via project financing or bank loans. The bond market has also been a popular funding option for the real estate sector, in particular perpetuals or bonds with no fixed maturity.

The need for funding by Singapore property developers to pay for land and en bloc deals will see more bonds sold in coming months, said Devinda Paranthanthri, UBS Wealth Management, Asian credit strategist.

"This will largely be driven by the real estate sector, as they are likely to raise funding for land acquisitions and en bloc purchases," he said.

Developers had spent almost S$16 billion buying land for 2017, comprising collective or en bloc sales of S$8.2 billion and land acquisition (single owner private land deals, government land sales sites at state tender) of S$7.65 billion, said Christine Li, research director at Cushman & Wakefield.

She added that so far in 2018, developers have forked out S$5.56 billion: made up of S$4.25 billion in collective sales and S$1.31 billion in land acquisition.

SGD bonds issuance in 2018 up to March 9 has been down - 16 per cent lower to S$4 billion - with less than a handful of deals done in the first week of March.

A grand total of four bonds amounting to S$610 million were sold in February, down 80 per cent from February 2017's S$3.1 billion raised from nine issues.

All of February's and those sold in the first 10 days of March were from the real estate sector.

The four in February were two TLCs or Temasek-linked companies - CapitaLand Commercial Trust and Ascendas Real Estate Investment Trust. The other two were regular issuers - FCOT Treasury, the financing vehicle of Frasers Commercial Trust and GLL or Guocoland Ltd.

March issuers have been HDB, ARA Asset Management and RCS Trust which is the investment holding company of Raffles City Singapore.

Mr Paranthanthri said the bond market might see some first-time property developer issuers.

"We recommend investors exercise caution when assessing the credit quality of these issuers," said Mr Paranthanthri.

Perpetuals or bonds with no maturity are likely to be favoured by issuers, he said.

Of the 26 perpetuals sold in 2016 to November 2017, half or 13 were by property companies including Real Estate Investment Trusts (Reits), according to data provided by DBS.

But DBS's Mr Lee said en bloc deals "may not lead to perp proliferation."

Real estate financing is done via project financing or bank loans, he said. But as banks don't lend 100 per cent to a project, developers could issue straightforward bonds or perps if they are undergeared, he added.

The bond market is also looking forward to more government issuances.

We could see more statutory board-issued debt, in line with the announcement during the 2018 Singapore budget that statutory boards and government-owned companies may now be allowed to borrow to fund infrastructure projects, said Mr Paranthantri.

"These longer-duration statutory board bonds would most likely cater towards institutional-type investors rather than retail investors," he said.

In the meantime more issuers and investors need to be lured back to the bond market, though Mr Lee said the market is "coming out of inertia".

The sustained rise in long-term interest rates from the end of 2017 continues to unsettle markets along with many commentators predicting the end of the multi-year bull market in bond prices.

The five-year SOR or swap offer rate has risen sharply to 2.2 per cent on March 9 from last year's low of 1.6 per cent on Sept 8. SGD bonds are priced off SOR.

The Markit SGD corporates' total-return index has been sliding after it hit an all-time high of 125 on Jan 16. On March 9, it was at 123.7.

"Rates volatility has caused people to pause," said Mr Lee.

As it stands now, the market is trying to come to terms with where interest rates will land, he said.

Typically when interest rates go up, bond activity will drop, he said.

Bond activity was down in the early part of 2017 but when markets took the view that interest rates will rise slowly, and everyone became comfortable with that view, issuances took off, he recalled. Bond issuances in 2017 was the highest in 12 years.

Mr Lee said volumes will pick up when there is an alignment of views of how interest rates will move.

Even though bond prices fall when interest rates rise, yet if interest rates go up too high, it could cause equity markets to crash and bonds might become attractive again, Mr Lee elaborated.

Still there's always appetite for high quality issues, said Mr Lee citing those by HDB and RCS.

Samuel Chan, Standard Chartered Bank's head of capital markets in Singapore cited another factor for last month's paltry volumes - low redemptions.

"By and large, issuance cycles do follow redemption cycles and Feburary has traditionally been a low-volume month; only S$140 million in redemptions versus SS$3.2 billion in Janaury 2018," said Mr Chan.

Investors have certainly been more selective as to what they want to invest in, he said.

TLCs, especially the rated names, have been much more palatable from a risk appetite and cost of funds perspective, said Mr Chan of the two TLC deals done last month.

"We do still see cash surpluses in the system which has been deployed to fill the mismatch in redemption, and believe appetite still remains for high quality/blue chip issuers at competitive pricing," he said.