Bond investors give home bias and Robert Kuok the thumbs up

18/12/2018

AS 2018 draws to a close, the local bond market isn't doing too badly, all things considered.

With two weeks left to end-2018, the Markit SGD corporates' total-return index is down a mere 0.16 per cent from the all-time high of 124.98 reached on January 16. The index has recovered quite a bit from the year low of 122.97 on June 11.

Bonds globally have staged a rebound since early November and the yield of the US 10-year Treasury has fallen to close to 2.88 per cent from 3.23 per cent in Nov 8 as markets now expect less aggressive interest rate hikes next year.

Bond prices move up, yields fall and vice versa. Bonds also perform better when interest rates are low.

Delving further into the Singapore dollar bond space, generally those sold by statutory boards and government linked issuers have done better despite their longer tenors and offering lower coupons.

And there's also the "Robert Kuok effect".

Mr Kuok's Hong Kong-based Shangri-La Hotel S$825 million 7-year 4.5 per cent bonds have shot to 102.68. It seems the Shangri-La bonds are tightly held and potential investors are not able to find any stock on the secondary market, not in Singapore nor Hong Kong, according to private bank sources. The bonds were issued last month.

Bonds are sold at 100 par.

The S$825 million deal is the largest senior dated bullet bond issued by an unrated corporate issuer in a single tenor offering over the last 20 years in the Singapore dollar debt capital markets, said Clifford Lee, DBS Bank head of fixed income in a report last month. It was also Shangri-La's SGD debut and took in over S$1 billion in orders.

Although the issuer is from Hong Kong, investors are pretty familiar with Shangri-La, such as its founder, Mr Kuok, and that the first Shangri-La Hotel was built in Singapore.

In fact the Malaysian billionaire's memoir with Andrew Tanzer is among this year's non-fiction best sellers in Singapore, with some 100,000 copies sold worldwide.

Among other bonds sold in November, HDB's 5-year S$500 million 2.55 per cent has risen to 101.17.

Not doing well, or in market parlance "underwater", is another SGD debutante - UBS' S$700 million Tier 1 perpetuals at an interest rate of 5.875 per cent. Although the UBS issue attracted more than S$1.6 billion orders in its Nov 15 debut, the price has slipped below par to 99.82.

Among October deals was the Land Transport Authority's 35-year S$1 billion 3.43 per cent: it's now at 102.21, off from an earlier 103.93 on Dec 10.

October also saw Temasek Holdings' first retail 5-year S$500 million 2.7 per cent and Singapore Airlines' 5-year S$600 million 3.16 per cent; they've climbed to 101.24 and 100.47 respectively.

HSBC which sold its S$750 million perps at 5 per cent, receiving about S$1.4 billion orders in September, while above water at 100.19, has yet to revisit its 101.11 high on October 2.

Meanwhile Temasek-owned Surbana Jurong's 7-year S$350 million 4.11 per cent, also printed in September, is hovering around 102.65. The inaugural offering was subscribed more than two times.

Doing poorly is Germany's Commerzbank 10-year S$400 million 4.2 per cent; it has been sliding since its September sale and is now around 98.

Home bias is pretty much the factor for SGD investors, though not all do well. DBS' S$1 billion 3.98 per cent perpetual, also sold in September, is under par at 99.78.

Does this mean home bias might deter more foreign issuers from tapping the SGD market?

Performance differential

The first point in the performance differential between the bonds of foreign and local issuers reflects mainly the home bias frequently displayed by local investors, said Ang Chung Yuh, Ifast senior fixed income analyst.

Taking one of the examples - Shangri-La - although the group is based in Hong Kong, investors here are very familiar, he said.

"This bias has been a long-standing issue, so I don't expect it to drive foreign issuers away now. Also, I think the phenomena manifests mainly in the lower borrowing costs paid by local issuers, but not in higher costs to be borne by foreign issuers," said Mr Ang.

"In other words, foreign issuers do not have to pay more for raising capital here, compared to doing it elsewhere."

Take for instance Logan Property Holdings Company Limited, issued in April due in 2021 at 6.125 per cent, he said.

Although the pricing was very attractive, relative to local developer credits, it was close to where the company's comparable USD bonds were trading at, on a post-swap basis, he said.

How will SGD bonds do next year amid uncertainty on both the economic and political fronts?

Patrick Ho, HSBC private banking investment strategist, forecasts two more rate hikes in 2019 by the US Fed, followed by an extended pause.

He expects the US 10-year Treasury yield to stabilise at around 2.8 per cent in the coming months.

HSBC has a neutral view on Asia ex-Japan local currency bonds, he said.

"We expect the Singapore central bank to adopt a lenient stance in its monetary operations. Moreover, the slower loans growth in Singapore should help ensure relatively stable interbank liquidity conditions," he said. "Hence, we continue to expect the SGD bond yield to stay in a trading range in early 2019."

Adapted from The Business Times

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