Bond Market Health Scan : Singapore
Numbers do not look good but do not be deceived. The market is showing some healthy diversification in the past months.
We seeing pathetic bond market issuance activity, not seen since 2008-2009 during the heart of the credit crisis and have had only 3 benchmark issues >SGD 250 million since June this year, granted that June was the driest month ever for corporate bonds with only 1 Heinekan SGD issue for that entire month.
| ISSUANCE AMT | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 |
| 1ST QUARTER | 4,155 | 2,525 | 1,764 | 6,052 | 5,920 | 9,037 | 5,370 |
| 2ND QUARTER | 3,303 | 5,937 | 3,410 | 4,422 | 4,530 | 6,912 | 4,242 |
| 3RD QUARTER | 2,136 | 7,071 | 3,472 | 8,778 | 6,555 | 11,288 | 5,062 |
| 4TH QUARTER | 3,051 | 215 | 2,807 | 5,427 | 4,294 | 3,787 |
The new issues for the quarter, if we take out the gargantuan HDB 5Y 1.45 bio issue, have shrunk to small and mid sized chunks of 30-150 mio from a host of mostly, unfamiliar names.
Names like Mencast, Hankore, United Enrivotech, Perisai Capital and such. Names that fund managers avoid because of the amount of credit work required for the small issue sizes that are unlikely to repeat in future issues given the small market caps of the companies involved.
Diversification of Issuers
We should congratulate ourselves for we are growing up. Our market is evolving into a new ballpark and engaging the retail segment, tapping on the fat bank balances sitting idle. Public awareness is gaining fast in bonds as a fashionable investment avenue.
Risks
Investing in small issues and high yield bonds do have their risks. A glaring one being the impossibility of obtaining prices. What do you expect when you buy an obscure company with possibly only 2 or 3 banking relationships ? Surely that bond will not be very liquid even with the originating bank.
The inavailability of transparent pricing leads to the second big problem that the buyer or seller would largely be at the mercy of their banker who has to be trusted not to pad the prices too much.
The sore absence of readily available credit research is also a massive blackhole for would be investors, who only have their banker’s assurances to rely upon.
Trend
Well, we have to understand that what is happening is a global trend. Just spent the larger part of the day at a high yield bond conference and got to understand some of the trends and developments in the NOK market where they have a sizeable junk bond market of NOK 25 bio.
The takeaway is that they are seeing increasing international participation and growth in the retail segment for their USD issues. They have grown in sophistication as savvy buyers participate in the marketplace making price discovery and comparison easier. Leveraged bond buying is really taking off and loans are readily available.
In Singapore, my opinion is that issuers have it too good. The retail buyers are not as discerning leading to some mis-pricings for certain high risk issuers which are often masked by illiquidity and wide bid-offers that do not work in the favour of investors.
I give the example of Tata Steel, one of the last benchmarks that came out in April for SGD 300 million. My opinion then was that the coupon should have been in the region of 6% or above but 4.95% had no trouble selling amongst the private bank clients then. The bond proceeded to lose 3% within a month and another 5% before July. Bankers dismissed that the coupon would be able to make up for the capital losses which was made worse in the cases of clients who had leveraged to buy the “hot” issue at launch. Well, the bond is trading at the 83 ct handle now.
If you held a gun to my head, Tata is in the high yield category and 5% is not high yield but we had little to compare against and I have nothing against them in the least because GIC does have a small share, I believe and their business is looking to turn around soon.
Outlook
Interesting times ahead. More funky names and issuers to come loaded with covenants that will bowl us over. Everybody is following the US lead and borrowing their guts out, it seems.
Khazanah Said Planning to Market S$650m of Convertible Sukuk
Oct. 17 (Bloomberg) — Malaysia’s state-owned sovereign wealth fund plans to market the Islamic bonds exchangeable into IHH Healthcare shares next wk, according to 3 people familiar with the matter.
Why Pay ? Just borrow. Even bond buyers are borrowing to buy bonds.
Does the term house of cards mean anything to you ?
Happy Friday.
Hi Tradehaven,
Finally, the bond price guide is out. The table is very well organised. Thank you for all your hard work !
There is another piece of information about bond is not easy to get, that is their term sheets.
Is it possible for you to provide them also?
Hi Bond
Termsheets are proprietary information that belong to the marketing banks, I do not believe they are publicly accessible.
As such, I am unable to provide that info.
You may however find the prospectuses lodged with the SGX for listed bonds.
Hi tradehaven, thank you so much for the splendid bond price guide, it is certainly invaluable to many bond investors. Btw may I ask this, Olam has two 6% bonds now. The one that mature in 2022 is trading around 88 while the one maturing in 2018 trading around 97. Is it logical to project that four years from now, the bond that mature in 2022 will probably be trading around 97 as well, since it will be kind of ‘in the shoes of’ the Olam 2018 bond now?
Thank you for everything again. Have a good weekend.
Hi Oldfolk,
I had to read your comment 3 times because I have never thought of it from that angle.
If the Olam curve remains unchanged i.e. credit and interest rates do not change, the roll down from 9 years to 5 years would give you more or less that price.
In an ideal situation, I would short sell 97 and buy 88 and keep the 9 bucks profit, keep it for 5 years and pay off the 3 bucks to redeem the 97 and still have the 88 which could be sold at 97, for another 9 buck profit, all in locking in 15 bucks for no cash upfront !
Just dreaming of course.
Hi tradehaven, deeply appreciated your kind reply and for sharing your thoughts and insights again. All along I am aware there is short selling in shares but how do one short sell bonds? Does it work thru the same platform of broking firm and banks? I certainly don’t think I am professional enough to do any short selling of bonds but I wont mind to be just a bit more aware of how such stuff work too. 🙂
Btw may I ask this. Previously in the old website, when there is a comment to my message I get an email update but I don’t seem to get any email in the new platform. Is there any way I can change some settings to let the system email me? I am so sorry to be asking such a silly question cos I am really bad at this.
Thank you so much again.
Hi Oldfolk
It is all said in jest and good humour. The execution is virtually impossible, in my opinion. Do not take me seriously.
Please sign up for the newsletter on the home page of the site to get email updates.
Thanks for your support.
Regards.
Hi Tradehaven,
What are your thoughts on bond funds? Are they a good alternative to bonds that would otherwise cost 250k a piece? Seems like banks like to sell this kinda of bonds funds to customers. Ignoring the cost of fund, commission and all the charges… is there truly value in such funds? A couple of them are giving dividend yield of >5% and looking at some of their 5 year records, I would say some of these funds have done rather well. (an average of about 8-9% for selected funds)
Btw, could you help me to create a topic on bond funds? I would like to get some feedback from the community too. Thanks!
Hi Newbie,
Bond funds are a good way to access a spectrum of bonds that are not otherwise available piecemeal to the investor who desires greater exposure.
The fees and commissions are something to be aware of.
I will not comment anymore because some of my friends are the portfolio managers.
The important task for the investor is to read through the prospectus of these funds and understand the risks and products that the funds are involved in as some of these funds use derivatives and leverage to deliver better returns. Yes, some funds have done rather well but there are others that are delivering sub par returns as well and big funds do not necessarily mean anything especially when they face huge redemptions and suffer because of their size – investors bear the costs of that.
Will create a topic on funds as I haven’t managed to fix the forum to allow for new topic creation yet.
Good luck !
Hi Trade Haven,
Thanks for your effort to collate all these bond issues. Can you explain how we can calculate a net return if one use leverage offered by the bank to buy corporate bonds? Good if you can show some numbers.
Thank you,
EH
Hi EH,
I have worked out examples in the old posts but the gist of it is quite simple.
If you borrow 80% of the value then you deduct your funding rate(you typically borrow 1m or 1w sibor + spread) off the coupon to get your return. Add that to the unfunded coupon and that is your total return.
Divide total return by your margin to give your annualised return on capital.
Because your funding rate is short term vs the long term coupon of the bond, you will have to make certain assumptions when you buy the bond and also have a view on the interest rate trend.
Best rgds
Hi tradehaven, thank you so much for providing us the USD bond prices and your insights. May I ask you a question, what can happen to a corporate bond , if the major shareholder managed to take the listed conpany’s stock private, taking advantage of the low share price of price to book of 0.3. Outstanding bonds still having 2 and 5 years to maturity.
No impact usually unless there is a specific clause in the IM for privatisation or change of control call or put option.
Would be present for companies in risk of LBO.
Otherwise, the bonds remain a liability of the company although the risks to the investor increases because privatisation decreases transparency.
This has happened a few times in Singapore. Tuas Power is one case I remember where Huaneng managed to exercise the call option on change of control and called back the bonds.