Singapore Bonds 2016 : The Unforgiving Monsoon

11/01/2016 by

The markets are nearly as tragic as the weather in their worst start to any year if the Dow is anything to go by, notching its worst 5 day start ever on record, 6.19% down for 2016. Given that we are living through the worst El Nino on record as well, 2015 remains the “hardest year to make money in 78 years“, as reported by CNBC, because 2016 is not over yet.

At a quick glance, 2015 has not been a good year for private investors in Singapore who have been hit by more misfortunes than others led by rising interest rates, defaulting bonds, market illiquidity and falling real estate markets that shrinks their personal wealth.

This has dealt a severe blow to the local bond markets, along with the individual investors who have been the anchor of banking in recent years, the “unburnt class” that we have written about (http://www.hnworth.com/article/2015/08/31/the-new-era-is-in-private-wealth-the-power-of-the-unburnt-class/) and have been instrumental in tripling the income of local banks’ wealth management units in the past 5 years. Friends from the industry inform me advisory desks averaged about 25-30% behind their annual targets last year with business after August trickling to a near standstill for some.

Why Singapore Investors Hurt More ?

Singapore yields are the worst performer in Asia after Indonesia, in absolute terms and worst performer on relative percentage terms, coming from a low base, enjoying years of cheap funding with a strong SGD.
Funding rates which determine investor returns on leverage have risen to 6-7 year highs as SIBOR and SOR notch their widest difference against USD libor rates for the most prolonged period since record keeping began, and the trend continues as funding rates closed the year at 7 year highs.https://tradehaven.net/2016-singapore-rates-outlook-diminished-prospects-is-like-alamak-its-buay-pai-but-sian/
There is no option for rate cuts, unlike our regional counterparts and China, because Singapore does not adopt a monetary policy which means that a weakening currency would only have the effect of higher interest rates and weaker currency comes from poor growth prospects as well as low inflation, an unavoidable prospect with oil prices at 14 year lows.
The SGD bond market remains undeveloped in sophistication with few institutional participants making prices that led to a sharp withdrawal of liquidity mainly due to the absence of available hedging avenues for even professional investors. There are no instruments for parties to hedge their credit exposures and the explosion of high yield bond issuances in recent years went mostly into retailers’ pockets. Sadly, many issues are under water with investors stuck with their gamble on their hunt for yields.
Private banks and advisory desks are mostly paid on commission which has led to aggressive sales tactics and mis-pricings of bond yields in the past, although yield hungry investors are just as much to blame, particularly those who had bought on leverage in their eagerness to maximise their returns, thinking they could find a bid should they need to exit.
The real estate market has been the main source of wealth for the average person and home prices have dropped for 9 quarters straight (2.25 years), which is the longest losing streak we have seen in 17 years. (http://www.bloomberg.com/news/articles/2016-01-04/singapore-home-prices-post-longest-losing-streak-in-17-years)
The first default since the Lehman crisis led to a sharp drop in investor confidence. Granted the last default was an orderly one out of Lehman Brothers, investors had a rude shock with Indonesian corporate, Trikomsel, which opted to restructure their SGD bonds with little explanation of how they managed to whittle their finances away and little legal recourse to pursue in seeking answers and no SEC here to police the markets. The other potential default out of Pacific Andes, a listed company in SGX, has also rattled bond investors’ nerves and all eyes are on the news for the next company to call it quits on honouring their liabilities.

Couple all this with the global macro economic picture and the nasty vibes we are getting from China, the individual investor is in for a dry spell in this season for the Northeast monsoon that is bringing thundery showers amidst periods of humid heat.

Private banks and premium bank channels have been in cold turkey, with new marching orders to reign in their wayward sales tactics, hearing unverified rumours that sales dealers are only allowed to recommend bonds within restricted name lists and discouraged from associating themselves with the high yield names they used to hawk in the past.

With the case for chasing yields passed to Europe and Japan, Singapore’s 2015 high yield space has only seen 12 new bonds paying over 6% in coupon, compared to 27 in 2014. In the meantime, rated issues have come to the fore, the oddball being Julius Baer AT1, paying SGD 5.9% to a 5 year call date, and which bears a Baa2 rating for a relative high risk CoCo issue that has a high write down trigger at 7%, compared to the more conservative 5.125% that investors ought to prefer.

Needless to say, most of these 12 names are trading under water or seeing non existent bid prices. Nam Cheong, issued as recently as Jul last year, saw its price plummet over 10% after their poor results and subsequent consent solicitation exercise to loosen their undertaken financial covenants.

This is how they rack up for those 12 names.

Nam Cheong takes its place among the 14 bonds which has lost more than 10% for 2015, yet beating still Temasek-owned-for-the-time-being NOL and Swiber by a mile.