December 26, 2018

We said 2018 was Not Time to be Bullish on Singapore Corporate Bonds earlier this year and we had the opportunity to speak to market people who gave us blank faces when we asked them what they thought of 2018 recently.

What happened to 2018? Why the haunted looks and blank stares?

No one can say what really went wrong because the financial markets have become a big fat mess for 2018 to be a year best left forgotten or more useful if remembered as the year before 2019.

Post shell-shock. What are the lessons we have learnt from 2018 that we can take with us into 2019?

2018 Recap—What Happened?

Total issuance matched total maturities (minus the defaults and the restructured bonds). Just about SGD 21.78 bio issued vs roughly SGD 21.6 bio, falling short of 2017’s SGD 24.9 bio of new bonds.

2019 Singapore Corporate Bonds Lesson Art 1Graph of maturities vs new issues

The Singapore market saw its second ever 40 year bond issue, after Temasek’s 40-year issue back in 2010, out of LTA. And 2018 has been an LTA bonanza year after a 3 year hiatus, launching bonds in the 10 year, 30 year, 35 year and 40 year tenors representing nearly a fifth of 2018’s total issuance. HDB bonds did not find as much love in the markets, with 6 new issues of SGD 3.515 bio to replace 5 maturities totaling SGD 4.505 bio, with none of the new issues matching their billion dollar benchmarks sizes in the past, despite their Aaa rating versus LTA’s unrated status, suggesting that the tenor could have played a part (noting that yield curve inversion has become the latest fashion statement).

After 2017’s peak default year (9 defaults), there 1 default only in 2018 out of CW Advanced Technologies for SGD 75 mio although local darling, Hyflux is almost as good as defaulted which will give Singapore their very first retail bond default very soon. It says so much for all the stricter retail listing rules talked about in the past.

On the subject of retail issues, Temasek came out to tap the retail markets with a small SGD 500 mio issue that made all 53,282 retail applicants very happy as the bonds proceeded to trade at a 2% premium on their $6k allotment shortly after issuance and retained their gains all the way.

In August, the market also welcomed its inaugural SGD Investment Grade Corporate Bond ETF that was perhaps a little poorly timed, right before the global yield spike and has been treading water since its price recovering in the past weeks. We would hope that it will give retail investors the avenue for diversification going ahead.

2019 Singapore Corporate Bonds Lesson Art 2Price chart of Nikko AM SGD Investment Grade Corporate Bond ETF. Source: Bloomberg

Thanks to Temasek, the stat boards (PUB, LTA and HDB) and all the Temasek-linked companies, or the Singapore market would look pretty dismal considering there were only 90 new bond issues for the year, the lowest number of deals since 2004’s 76.

On the other hand, we note the largest number of billion-dollar deals to hit the market on record, a total of 5, thanks to LTA accounting for 3 of them and DBS and OCBC for each of their billion dollar perpetual bonds to replace 4 mega-billion dollar maturities.

There is no joy if more than half the new issues are trading under their issued price.

We present the worst performers of 2018.

2019 Singapore Corporate Bonds Lesson Art 5Table of the worst performing new issues in 2018 (prices unverified)

Half is a small percentage because we estimate more than 85% of outstanding bonds to have suffered capital losses in 2018 which is probably the first year where half the bonds out there are trading under 100 and we would include the table of biggest losers to give ourselves some perspective.

2019 Singapore Corporate Bonds Lesson Art 6Table of bonds with largest capital losses in 2018 (numbers unverified)

Compared to the SGS market, profits have been comparatively harder to find. Indeed, buying into new SGS issues have proven pretty profitable for investors with SGS auctions handing to investors between 1 to over 6% in returns as we speak.

We present the best performing new issues of 2018 which account for the bulk of the 60 odd bonds that made capital gains for the year.

2019 Singapore Corporate Bonds Lesson Art 7Table of the best performing new issues of 2018 (prices unverified)

2018 Narrative

The worst performing bonds of 2018 were more likely to have been issued earlier in the year before credit spreads imploded.

Traders and investors cannot contain their disgust as new issues widened and widened more which crystallised losses on existing issues even as rising interest rates inflicted equal damage.

New Issue Repricings

We graph the precipitous collapse of the HSBC SGD perpetual issued sometime in 2017 when the new 5% issue was announced in September which caused the old bond price to collapse from 102 (4.12% yield) to 100 (4.7%) just shortly after hitting a high price of 104 earlier in August.

2019 Singapore Corporate Bonds Lesson Art 8Graph of HSBC 4.7% Perp vs HSBC 5% Perp.

It was largely the same for the new Commerzbank 4.2% subordinated bond(see worst performers above) that was announced a week earlier (that caused the HSBC 4.7% to collapse from 104 to 102?) that resulted in a drop in the old Commerzbank bond price.

2019 Singapore Corporate Bonds Lesson Art 9Graph of Commerzbank 4.875 2027 vs Commerzbank 4.2 2028

Yes. Some bankers have informed us that the Singapore market is special in that sense, that folks do not care much about credit spreads or value bonds using them which can be a lesson for some and a boon for those who bother to follow the international bond markets and buy SGD bonds only if their spreads are fairly valued at the global level.

The major repricings were also witnessed in the SReit and Temasek papers as each issue widened over the last. We had AReit (A3 rated) issuing a 7 year paper at SOR+0.72% in March before CCT (BBB+) issued their 7 year at SOR+0.92% 2 weeks later and markets never looked back until 100% Temasek-owned Mapletree Treasury Services paid SOR+1.1% for their 8 year paper in September and a late-in-the-game Ascott Reit (Baa3/BBB) had to fork out SOR+1.16% in November to get a deal through.

It was worst in borderline junk cases such as Perennial Real Estate which issued a 3-year paper in January at 3.9%(SOR+2.25%), only to pay 5.95%(SOR+4%) for a 2-year paper in August.

2019 Singapore Corporate Bonds Lesson Art 10Table of worst credit spread widening for new issues in 2018

2018 success stories can mostly be attributed to leverage. Yes, leverage accounted for most of the success we saw in 2018 or initial success, at least.

Cache Logistics perpetual was launched to great aplomb, as we hear some private banks awarding 50% loan value to the bond. It was likewise with ARA perpetual, HSBC perpetual, UBS perpetual and yes, even for Oxley (see worst performing bond table above).

Shangri-la Hotel’s 4.5% 7-year bond was perhaps the most aggressive as we were informed the loan value assigned was as high as 70% in some banks which justifies its 102 price handle while new Metro Holdings 4% bond did not attract as much attention because loan officers shunned the name.

There is a lesson to learn from that although we wonder if Commerzbank did get the same leverage as before which was rumoured to be between 70 to 75% and how did the new bond issue tank so badly if that was the case unless those private banks changed their minds?

So much for the Mark Twain quote that “a banker is a man who loans you an umbrella when the sun is shining, asks for it back at the first sprinkle of rain.

At the same time, we wonder what so bad about Capitaland or Mapletree, that some banks would not loan against their bonds (which should be deemed safer) and chose to loan against bonds like Lend Lease (see largest capital loss table) for the fact that the company still has a Baa3/BBB- rating?

We also do not know a single financial advisor who would recommend their clients participate in government bonds auctions to net the gains mentioned above.

In any case, not all investors were unhappy in 2018 for we had happy campers when Unicredit redeemed their SGD bond in July despite being a little late on the announcement and Aspial bond holders had a little treat when the company announced a bond tender for their 2018 and 2019 papers which were trading at a steep discount shortly before the news. We would be sensitive in the case of Ezion, just to say the restructured papers have done well.

2019 Singapore Corporate Bonds Lesson Art 11Graph of Unicredit SGD bond price over the years until July 2018.

Lessons from 2018 for 2019

As we had said earlier this year, the largest risk to the local bond market was Liquidity, as highlighted by an IFR article citing that banks “are not obliged to, and will not, make a market in the notes”.

2019 Singapore Corporate Bonds Lesson Art 12Taken from an email alert from IFR, 2018

That is perhaps why DBS was quoted saying that “the markets are functioning well”.

That is because No Bid Means No Bid.

One could probably not even get out at a distressed price and we are aware that throughout the year there were OUE and Lippo papers looking for a home, not to mention a long list of others like the HNA-owned CWT or NOL or RHT. Too bad, no bids!

We are learning that senior status does not mean protection in a default because if Hyflux will have their way, their senior bondholders will only get an estimated 15.8% recovery versus 13.2% for the junior subordinated retail bondholders (source: Redd Intelligence) and we are surprised that many a senior bondholder were not aware of any bondholders’ meetings.

You are Alone in a Default! (read Mark Twain’s umbrella quote above).

Yet, there are heaps of opportunities with sticky prices during times of volatility.

We use the example of Temasek bonds whose prices did not move much even as the government bonds were rallying and suddenly caught up with the market on a whim this month, raking the investor a neat 1% gain in less than a month. Sticky prices could be put to good use in an illiquid marketplace if one bothers to source for such pockets of opportunity.

We Are Not Looking Forward to 2019

We do not know what happened in 2018 where 93% of asset classes in the world suffered losses and we are ending 2018 on a cusp of a global debt crisis with just nothing but bad news from every front with regard to bonds, bond ETFs, leveraged loans and their ETFs. Ther are more downgrades as credit quality deteriorates for Investment Grade to be majority BBB names.

With Johnson & Johnson’s recent asbestos scandal, it looks like we will only have 1 pure AAA/Aaa/AAA company left in America—Microsoft.

And who would be interested in corporate bonds when the yield curve has inverted? 6M swaps are higher 5-year rates?

It would make little sense to be buying bonds or funding at such levels.

On the bright side, 2019 will have a small pile of maturities, at SGD 14 odd billion, some 33% less than 2018’s SGD 21 bio.

2019 Singapore Corporate Bonds Lesson Art 13Graph of upcoming maturities in 2019

It is not looking terribly exciting with no billion dollar maturities to replace next year. Indeed the largest maturity would be DBS in June for SGD 805 mio and Frasers with SGD 1.1 bio to replace in total.

2019 Singapore Corporate Bonds Lesson Art 14Table of large maturities in 2019

No excitement to look for in defaults, because there are few bonds left to default with only RHT Health Trust 4.5% due in Jan but likely to be deferred as IHH finds a way to complete its acquisition of Fortis Healthcare.

Hyflux has stated intentions to convene bondholder meetings in the months ahead and the other likely local default, Vibrant Group, which is under pressure to produce its accounts (after a mysterious fire destroyed valuable paperwork), does not have a bond maturity until 2020.

Other than the Chinese real estate issuers and Lippo gang, the SGD dollar market has only the smaller real estate names to worry about.

Our blank-faced friend told us 2019 will be about capital preservation and outlasting the field. Not losing money for 2018 is not more praise-worthy than losing a bomb because investors and bosses do not appreciate anything but profits.

It shall be a good year for those who do their credit homework properly in a dysfunctional marketplace, with opportunities in illiquidity and mispricing’s as credit knowledge is properly challenged after years of excesses.

We have another friend who is fleeing to Patagonia for a few weeks to get as far away from Singapore, Singaporeans and the Singapore markets as possible, running away from the rest of 2018, perhaps dreading 2019.

For us, 2019 cannot be too bad. After all, we have the lessons from 2018.