IFR Asia: Southeast Asia debt capital markets guide – Singapore

IFR Asia Southeast Asia DCM report – Singapore

December 2009

Singapore wants its local currency debt capital market to be one of its many foundations as a regional financial centre. It’s doing fine, but it might be a surprise to learn that it’s not even southeast Asia’s most prolific corporate bond market – more was raised in ringgit in 2009 than in Singapore dollars, according to ThomsonReuters data.

“The primary market got off to a rocky start at the beginning of the year, mainly driven by a lot of caution,” says Clifford Lee, managing director and head of fixed income at DBS. “Funding was done for refinancing rather than added leverage and the general tone has been more defensive than anything else.”

Although full-year totals are likely to be down from their highs – S$15.235 billion was raised in 2008, whereas just S$9.87 billion had been raised in 2009 by November 19, according to ThomsonReuters – the signs are good for a broadening of the issuer base.

Lee believes in recent years the Sing dollar market has answered its critics. “Previously there were three criticisms of the Singapore dollar market,” he says. “First and foremost was that this market can’t absorb large size. We’ve proven that to be untrue,” he says, referring to a self-led S$1.5 billion hybrid tier one deal for DBS Bank in May, the country’s largest ever Singapore dollar bond deal. Other big deals last year – including a S$600 million hybrid tier one deal for Maybank – support his view. “That belief of constraint has been emphatically debunked.”

The second traditional complaint was that longer tenors could not be achieved. “The market has matured and 10 years is now commonplace,” says Lee. Shortly after speaking, DBS completed an inaugural S$660 million bond issue for Temasek in 20 and 30 year maturities, and has done other deals with 15 and 20 year maturities. “In fact there’s more demand there than for below 10 years,” Lee says. “We are cracking the maximum tenor glass ceiling: for government-linked names and high grade names in Singapore, that’s not an issue anymore.”

The third is the number of investors. Here, too, Lee has seen change. “DBS has been in the Singapore dollar bond market for many years, and previously when we did a transaction we would have maybe 10 to 15 investors within a transaction, maximum. Of them, five or six would be the anchors for every transaction.” Today, things have changed. “The last few public transactions we’ve done saw 60, 70, 100 coming in. It’s taken away from the situation where it was dominated by a handful of investors. It’s given price tension some development, and the secondary market trading is starting to pick up nicely, though it’s still not where it should be yet.”

A key theme in 2009 was the arrival of supranational issuers in Singapore dollars. KfW came twice, for just under S$300 million and S$200 million respectively; the African Development Bank raised S$310 million, and the World Bank S$230 million, all four deals coming within two weeks in August and September. Attracting multinationals does test the limits of the swaps market, but interest so far has been strong.

“The supranational issuance was probably 90% triggered by two things,” says Jan Wipplinger at Deutsche Bank. “Local treasuries of banks being long liquidity; and the MAS [Monetary Authority of Singapore], in regards to allowing AAA-rated supranational issuers and their bonds to be used in the same way as SGS local government bonds for minimum liquid asset requirements [see MAS interview, box]. All of a sudden, investors could switch out of government bonds into supranationals, and use that for the same purposes as government bonds before.” That, Wipplinger says, explains why all the supranational bonds this year have been three years in duration: “That’s where the best pick-up is offered: 50 to 75 basis points over government bonds.”

In previous years retail has played a role, particularly in tier one bank issues, although that has been less widespread in 2009. “In Singapore, the tier one space will come back again,” says Terence Chia at Citi. “In 2010 we should expect to see more such tier one issues either from the local banks or very strong, internationally-recognised names tapping the Singapore dollar market.”

Peng-Meng Ling at Standard Chartered notes there is clear appeal for retail in a low-interest, high-wealth market like Singapore. If a deposit account is paying 1% or less, then a recognizable name offering 5% for two or three years – a bank, perhaps – is going to find an audience. Ling highlights the strength of high net worth individuals as a key part of the Singapore investor base, active in deals for issuers like Hyflux, HPL, CDL and Korea Development Bank in 2009.

Still, retail here is not really the same force as in Thailand, in which buyers drop into their branch to buy a bond. “99%, if not more, of the bond offerings in Singapore have traditionally been offered into the QIB market, for qualified institutional buyers. It hasn’t been meant for mass retail as yet,” says Lee. “So-called retail participation comes in the form of private banks: priority banking-type customers, and they are governed by a minimum size of $250,000 per investment. From an arranger’s standpoint we still don’t sell directly into retail: we sell to private banks, and they sell to retail.”

Still, despite improvements, the Singapore dollar bond market is not all that it could be: lower rated names struggle to access capital. “Rating is still a constraint in the Singapore dollar market,” concedes Lee. Regulation in Singapore doesn’t require bonds to be rated to access the market, but going down the credit curve is nevertheless a challenge.

“We feel we’ve reached a point in the market where domestic investors are keen to see a return of a wider range of international issues,” says Reuben Tucker at ANZ. “But the Singapore dollar market has been exceptionally well balanced in terms of the types of deals seen here: well-known corporate, property transactions, and international issuers.”

Box: The MAS

The Monetary Authority of Singapore oversees the development of Singapore’s local currency bond market. The institution shares it views with IFR Asia on how it’s doing.

“Compared to five years ago, the Singapore bond market has steadily grown by more than 50%, with healthy activity seen from both the corporate and public sector,” says an MAS spokesperson. The authority says it expects healthy new corporate debt issuance in the coming year, in light of expectations of rising global interest rates. “Anecdotally, investment banks have also indicated healthy deal pipelines going into 2010.”

The MAS highlights its high turnover – one of the highest in Asia – and increasing liquidity, with tenors available from one to 20 years, and structured instruments increasingly commonplace. In 2009 it has also attracted increasing numbers of foreign issuers, particularly supranationals. “Foreign issuers make up approximately 30% of S$ debt issuance,” the authority says.

One of its more recent initiatives was to build an Islamic market. In January it announced its first sukuk facility. “It is unique in two aspects,” says the spokesperson. “First, issuance is on a reverse inquiry basis, which means we will issue sukuk according to the needs of banks in Singapore conducting Islamic finance. Second, the sukuk is priced against the Singapore government securities market to provide a transparent price discovery mechanism for these instruments.” The theory is that as the sukuk market grows in Singapore dollars over time, it will then develop its own pricing benchmarks.

“The design of our sukuk facility reflects our effort to tap the strengths of conventional finance, while adhering carefully to Shariah principles,” says the authority. The MAS says the facility has received “strong response”, and has issued tranches to the Islamic Bank of Asia (part-owned by DBS), OCBC and CIMB Bank. “We remain committed to the programme size of S$200 million.”

Additionally, the MAS says the private sukuk market has developed substantially since the facility was launched. City Developments Ltd set up a S$1 billion medium term note programme in January, with S$100 million issued to date, while the Islamic Development Bank issued S$200 million of sukuk via a private placement in September.

One of the biggest impacts the MAS has had on the market this year was the enhancement to its treatment of high quality collateral, allowing AAA-rated Singapore dollar debt securities from supranationals, sovereigns and sovereign-guaranteed companies to be used as collateral to access central bank liquidity. Banks are also permitted to treat these securities as tier two liquid assets with the same (zero) weighting as Singapore government securities.  “These measures, and the issuance that followed, helped banks to diversify their holdings of liquid assets, in the process strengthening financial stability in the banking sector by growing available high quality assets in the banking system,” says the MAS. Since the implementation of the framework, the market has gained about S$2 billion of new issues from triple A rated issuers.