SGD NEW ISSUE : HDB 5Y 2.365% IT’S TIME TO RECALIBRATE YOUR RISK FREE RATE
Our valuation systems have just been thrown off the scale ! It’s off the radar because HDB just launched a 5 year this morning at 2.365%.
Do you have any idea what this means ?
Bad. We should stop our yield chase pronto.
ISSUER: Housing and Development Board
RATING: Unrated
SERIES: 55
FORMAT: S274 & 275 and Reg S Bearer, Fixed Rate Notes (off Issuer’s S$22bn Multi-currency MTN Programme)
STATUS: Fixed Rate, Senior Unsecured
ISSUE SIZE: S$1bn (with an option to upsize)
SETTLEMENT DATE: 19 September 2013
MATURITY DATE: 19 September 2018
COUPON DATES: 19 March and 19 September (First Pay: 19 March 2014)
ISSUE PRICE: 100.00
COUPON: 2.365% s/a, ACT/ACT, Following Business Day Convention, 55bps above 5yr SOR @ 1.815%
DETAILS: S$250k x S$250k / MTN Prog / SGX-ST / Singapore Law
Implications :
1. Appetite fading fast because either banks have run out of lines for HDB or there is no demand
2. Current holders of HDB will not be happy especially those who had bought the other two 5y issues this year at 1.23% and 1.368% who have seen significant mark to market losses.
Some Stats :
1. There are SGD 14.6 bio worth of HDB bonds out on the streets, not including today’s SGD 1 bio (with option to upsize to SGD 1.5 bio). And this is potentially not the last HDB we will see for the year. Outstanding Singapore Government Bonds is SGD 83.5 bio.
2. This is the highest coupon we have seen for a 5Y HDB that has not matured. The last high we saw in coupon for a 5Y HDB paper was in Feb 2011 when they printed at 2.0225% (that bond matures in 2016).
3. This coupon represents an almost 1% increase over the last HDB 5Y bond printed in May this year at 1.368%. The 5Y interest rate then was 0.95% compared to today’s 1.77%.
So we can be sure that there is some credit deterioration in HDB.
Let’s take a look at the HDB issues.
We have to accept that the new threshold is 2.365% for 5 years, for corporate bonds.
So I cannot imagine CDL 2.45% 03/2018 5Y bonds at 2.75%, DBS 3.3% sub debt callable in 2017 at 2.89% or NUS 1.038% 01/2018 bonds at 1.72% still.
I list some examples of the bonds below.
| SMRT CAPITAL PTE LTD | 1.2 | 5-Oct-17 | 1.75 |
| SINGAPORE BUS SERVICES | 1.8 | 12-Sep-17 | 2.36 |
| DBS BANK LTD | 3.1 | 14-Feb-23 | 3.00 |
| UNITED OVERSEAS BANK LTD | 3.15 | 11-Jul-22 | 2.97 |
| SINGAPORE LABOUR FOUNDAT | 1.3 | 8-Jun-17 | 1.75 |
| FCT MTN PTE LTD | 2.85 | 12-Jun-17 | 2.67 |
| DBS BANK LTD/SINGAPORE | 3.3 | 21-Feb-22 | 2.89 |
But does it means investors should be congratulating themselves on their Tat Hong and Oxley purchases at >3% yields ?
No. Because if this HDB means anything, it means that new issues are going come at higher and higher yields.
The expectations are for higher returns now. Investors, alike, will have to recalibrate their radars. Just look like the issues coming out, Hiap Hoe 3Y 4.75% vs Oxley 5Y 4.75% ?
Do not be left behind.
Related Articles :
Singapore Reits and Their Bonds – A Game Changer (tradehaven.net) 30 Aug 2013
Taken from HDB’s MTN Prog:
“HDB’s deficit is financed by Government grant. In addition, the Ministry of Finance will act as a lender of last resort to HDB for its funding requirements. In the event there is a change in the funding arrangement with the Government, this may affect the ability of HDB to comply with its payment obligations under the documents relating to the Programme and the Notes”
Prima facie this issuance at these lvls suggest widening of SG’s sovereign spread (& hence HDB), but Temasek’s USD bonds have actually tightened slightly since start of the year…rare to see this issuer’s generosity but yes does set a higher hurdle for what is becoming a more selective SGD mkt with so much yield handles of 4% easily…
Question is: why would banks not want to loan to HDB since it is indirectly backed by the government? Do the banks know / foresee something we dont? Applying simple logic, if HDB credit rating in the eyes of the banks remains the same, we should expect a 1% yield recalibration of 5y bonds to the new benchmark set by HDB? That would probably mean we should expect at least a 3.5% and above coupon for blue corporate bonds like some of those you mentioned.
Final Book Size SGD 1.45 bio (greenshoe was 500 mio so it was almost fully taken up).
Banks have Single Largest Borrower limit. Usually the property companies (that pay more). No point lending too much to HDB (at low rates) because it is a waste of balance sheet and HDB is not rated so it poses a problem for foreign banks.
Saving grace is that HDB bonds can be used for stat reserves (with a small haircut) and they present a decent pick up over govis if you sacrifice the liquidity.