Private banking capital is king in the Singapore dollar bond market

Issuers unwilling to seek ratings as they remain comfortable tapping ample private banking liquidity

Date

2 Feb 2018

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IN the Singapore dollar bond market, private banking capital is king. But institutional capital is the dragon that lurks beyond the border.

Could a change in ratings culture improve the health of the market, attract a greater diversity of market participants, and in turn bring longer tenor, larger size issuances? Or have Singapore’s issuers become too comfortable with their dependence on private banking capital?

Richard Lai, group chief financial officer of Singapore’s GuocoLand Limited, explains that almost all of his exposure in the Singapore dollar bond market is private banking capital. “So long as that private banking investor base continues to be there, there’s little incentive to try and tap the institutional investors,” Lai says.

Hand-in-hand with high private banking participation, the market is particular in having many unrated names. “Based on our data, currently the Singapore dollar bond market has about S$150 billion (US$111.4 billion) in outstanding bonds, of which about half is unrated,” says Evi Farida, deputy director and head, domestic markets division at the Monetary Authority of Singapore (MAS). “We don’t think this phenomenon is healthy for long-term market development. MAS would like to see a higher share of rated issuances in the Singapore dollar bond market.”

“Singapore is our preferred market, because we have a stronger brand recognition in Singapore and there is no rating requirement,” says Lai.

A lot of those unrated names are considered investment grade, explains Chia Woon Khien, senior portfolio manager at Nikko Asset Management: “Government or Temasek-linked corporates are considered investment grade simply because the sovereign rating is high,” she says.

While unrated issuers can mostly meet their funding requirements by tapping an ample supply of private banking capital, being unrated means issuers struggle to attract foreign or institutional investors. As such, issuers also find that liquidity dries out for longer tenors.

“One of the things which is still limited in Singapore is the duration. The market is pretty active up to five years, but beyond that, liquidity just peters out,” says Lai.

“However, institutions which can do longer term durations are stickier in terms of yields. As soon as you start shifting that bar, they typically fall off quite quickly,” Lai continues.

For investors like Alexander Zeeh, chief executive officer of S.E.A. Asset Management, the unrated nature of the market provides the juice. “We like Singapore dollar bonds because they are unrated and have attractive yields,” he says.

Devinda Paranathanthri, director, APAC credit at UBS Wealth Management, disagrees: “For us, the yields are not attractive for the risk-reward you are getting. Most of the demand comes from investors with Singapore dollar liquidity who don’t want to take currency risk and go elsewhere,” he explains.

Investors generally view the market as having three tiers of quality. “The top tier would be the Statutory Board,” explains Todd Schubert, head of fixed income research at Bank of Singapore. “The second category would be Temasek-linked type companies, and the third is the ‘everything-else-category’, where you have most of the problems.”

“We have three tiers,” adds Paranathanthri. “But we also have another tier at the bottom where we don’t want any exposure at all, regardless of the yields.”

As part of efforts to further deepen the bond market, this year the MAS introduced three grants: the Asian Bond Grant, the Green Bond Grant, and the Singapore Dollar Credit Rating Grant. “The grants are meant to spur activity and excitement in the market,” says Farida. “The Credit Rating Grant was introduced to encourage issuers to rate their bonds. This will help provide greater transparency to investors and broaden the pool of investors for issuers.”

However, so far, no issuers have come forward to apply for the credit rating grant, despite S$400,000 on the table, raising awkward questions.

“In a way, it’s putting a gun and saying, look, if you are not going to get a rating because I am paying for it, you will face a lot of questions from investors,” says Zeeh.

So why are issuers still so reluctant? Amit Ganju, senior director, head of business & relationship management group at Fitch Ratings, suggests one reason: “Issuers in this region still see ratings as a cost. There’s a change of mindset which has to happen. It has to be seen from a long-term perspective, to see it as an investment,” he says.

However, for others, the decision to get a rating is more complicated. “No-one wants to be the first guy to have a single B rating,” says Schubert. “There’s nothing in it for ‘B guy’. A treasurer doesn’t want to increase the cost of capital by getting a rating just to help market development.” Schubert suggests the MAS should start by encouraging Temasek-linked companies to get a rating first.

“About two years ago, the debt capital and credit market conditions were very challenging hence after thoughtful commercial considerations we returned the ratings of the listed entity and strategically walked away from the bond market,” comments Gopul Shah, director, corporate treasury & structured trade finance at Golden Agri-Resources Ltd.

Some treasurers may worry that a rating could affect their relationships with loan bankers. “Once there’s a transparent rating out there, they worry some banks may view their credit differently,” says Raj Malhotra, head of DCM, SE Asia, India & Australasia at Societe Generale.

There’s also a lack of demand for ratings from some segments of the investor base. “Certain investors may say, okay, I recognize the name and I am getting a decent yield, do I need a rating on top of that? Not really, I am comfortable holding this paper,” adds Malhotra.

However, some investors would still welcome the transparency it brings. “As an investor, I want you to get rated, as the more transparent, the better for us,” says Chia Woon Khien.

“I think it’s for investors to demand ratings,” chimes Schubert. “A company is not going to have a rating, if they don’t have to. Having a rating means you have to run your business according to what the agency says”.

Raymond Chia, head of Asian credit research, Asian fixed income, at Schroder Investment Management, disagrees: “Credit ratings are not a way to teach you how to run your business. They are a check and balance as to your creditworthiness.”

While issuers may be put off by the increased publicity and scrutiny, ratings may become necessary as the funding requirements of the business change. “It’s not that you have to get a rating, it’s really what the business wants to achieve,” adds Raymond Chia.

Moreover, following a spate of defaults in recent years, a rating may be a way for issuers to differentiate themselves. “You may become the victim of the bad apples. People are going to say, ‘they are unrated, I’ve had these ones before, and they all went bust, I won’t buy them’,” Zeeh says.

“I have met quite a few institutional investors, insurers, small banks outside of Singapore who are investing in funds or in funds of funds. Some of them cannot buy funds that own even one single unrated bond,” Zeeh points out.

However, participants generally oppose making ratings mandatory. “If you compel the companies which are going to end up with lower ratings to get a rating, they’ll find an alternative and go back to the bank market,” adds Lai.

“I am not in favour of a regulation saying that you need a rating,” says Ganju. However, he adds, “If you’re looking at larger issuances, at more serious and long-term players, then you need to look at ratings more seriously.”

For Singapore’s issuers, change will only come once the downsides of getting a rating are outweighed by the upsides of tapping a broader investor base. So for now, the self-perpetuating culture of unrated issuances is unlikely to change overnight.

“Getting a rating is not an easy decision for a corporation. Like a marriage, it’s a long-term commitment and there are many factors to consider. We hope to see more rated issuances but we recognize that companies need time to think it through,” says Farida.

Date

2 Feb 2018

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