April 29, 2019

A friend was specifying her top requirement in a new car—a good horn, with a stern pitch and not those friendly sounding beeps. One that sounds like it means business without irritating or provoking fellow road users.

For her, you can keep those fancy gadgets or irritating start-stop engines because a good horn, used astutely, can save lives. Imagine if someone juts into your lane abruptly, forcing you to brake, honk once for bad road etiquette and no signal lights, honk again, to warn the cars behind you that you are braking hard or the long one for, “please don’t do anything stupid, I am coming through, don’t drift into my lane ‘cos you don’t like the idea that your lane is about to merge”.

It is preventive honking.

There is no sense in being polite, someone could be driving straight into you which was what happened to honk-convert friend. The high beam did not work and the chap crashed right into her side when she had every right of way and her nightmares from the trauma continue until today.

On the Subject of Close Calls

How safe are the bond markets anyway? And we drew a blank gaze. That would be the tougher question it would appear than car horns but there is no turning back. After another close call last week, with CWT Singapore’s close shave with bond markets and managing to redeem their SGD bond maturity just days after their parent, HNA-controlled CWT International (521 HK), triggered a cross default. Luck would be on the Singapore market’s side (much similar to those Swiber bonds that were redeemed just weeks before the company defaulted with no impropriety found) as CACHE Logistics’ and AIMS Reit’s bonds get some room to breathe aside of the CWT contagion.

It does not help that the S&P rating agency had to audaciously poke their noses into the Singapore markets injecting a dose of pessimism, despite not being a big player in the local rating scene, we would wonder where they have been all these years and given that Moody’s is the preferred rating agency as far as Singapore dollar bonds are concerned.

Honk Bond Market Health Check Art-1Source: Business Times

Yes, the only ones happy for a default would be the reporters mainly, reveling in the Hyflux debacle right now to fill those pages with “newsworthy” news, “tabloid” style as it continues to drag with this week’s smoke-and-mirrors stunt and the sudden emergence of a new white knight at the 11th hour.

As for the frantic friend who had called asking for an opinion on his NOL bond (price fell off a cliff), our unsympathetic reply, “Told you to sell them, no, when you were up 10% last year?”

Honk Bond Market Health Check Art-2Chart of the NOL bond’s roller coaster price change (unverified for accuracy)

Of course, he only wanted the dumb coupons but we couldn’t help him with the bond math and cash management because the chap was fixated on the idea of coupons and that’s Singapore for you, for all the finance graduates who go on to becomes star bankers and they just cannot bear to sell a bond because of a stupid coupon, Finance 101 and yield curves thrown out of the window.

And the sentiments did not improve much this week after Bloomberg published another sensational new Singapore default watchlist which had to include that NOL bond of his, along with the other CWT that is maturing next year, Lippo Malls, Oxley and Vibrant Group. Errr, when was the last time a real estate company defaulted?

Honk Bond Market Health Check Art-3Source: Bloomberg

Having said that, mortgagee listings have hit a new record high in 1Q19, according to BT, with the worst yet to come and we do not know who to believe because the ST tells us that home sales are picking up at the same time.

Honk Bond Market Health Check Art-4 Honk Bond Market Health Check Art-5Source: BT and ST

There have been a few close calls this year besides CWT’s bond redemption on the week it’s parent defaulted on a loan. Just take a look at the graphic below to imagine the heart-wrenching moments for the bondholders of RHT, Trafigura and Halcyon Agri below.

Honk Bond Market Health Check Art-6Charts of RHT, Halcyon Agri and Trafigura bonds before their redemptions earlier this year

2019 Has Been a Nice Dream

So much for all the “worst is yet to come” cry-wolf rhetoric—Singapore bond markets saw a booming SGD 7.8 billion worth of new papers, more than double the amount that matured which is just around SGD 3.5 billion (not counting the defaults).

The markets have been tame with major new issues mostly afloat (list below) because the majority of new issues have been government-linked names, statutory boards, financials and decent real estate names, including Metro. Even the only high yield bond of the year, ESR Cayman, is backed by Warburg Pincus and gunning for a HK IPO which does not really mean it is any less risky.

Honk Bond Market Health Check Art-7Table of major SGD bond issues so far in 2019

It should be a congratulatory pat on the back that the new issues are holding up considering that Singapore government bonds are one of the global laggards this year with its 10 year yield underperforming almost every country we can name with bond markets in Asia, including China, giving Singapore a healthy buffer against the zero-rate regimes out there.

Reflecting global sentiments, credit spreads have caved in and junk bonds have returned 7-10% year to date if we take a look at the chart of the Barclays High Yield Bond ETF (JNK US) below.

Honk Bond Market Health Check Art-8Chart of JNK US

We tabulated the top 20 returning bonds in Singapore for 2019 (not accounting for financing and coupons), accuracy unverified, to give ourselves an idea of how Singapore compares.

Honk Bond Market Health Check Art-9Top 20 performing bonds in Singapore, year to date.

Some names should not be there, in our opinion. Manulife was never in trouble and neither was Lendlease. The market obviously is still far from sophisticated then as friendly traders have informed us that a specific Manulife bond did flounder for several months, trading way below fair value, and now its credit spread has finally come in to be respectably close to its international levels.

As for the rest, all we can say is that we can only count 5 bonds with prices above par.

For those who are feeling brave, we found (without verifying) some junky names with decent yields left in the market, probably for some good reasons (or not, if the Manulife story above is anything to go by).

Honk Bond Market Health Check Art-10Table of high yield bonds in SGD (prices unverified)

We suspect the reporter must have sought inspiration from a similar source and yet we wonder why First REIT and Pacific International Lines were not brought up. Just take a look at First REIT’s stock price below and we threw in the STI REIT Index for good measure but decided against bringing sister company, Lippo Malls Retail Trust in, their double-digit yields giving the equity a fight.

Honk Bond Market Health Check Art-11Graph of First Reit against the STI Reit Index

It’s Zombie Land Out There

Very little makes sense in the markets these days.

Junk bond yields have fallen below rates on leverage loans, a pretty rare occurrence. 

Honk Bond Market Health Check Art-12Source: WSJ

This is as world trade volumes are plunging at the fastest pace in a decade.

Honk Bond Market Health Check Art-13Source: Bloomberg

According to a Bernstein report, the percentage of loss-making companies listing shares for the first time has reached tech bubble proportions of about 80% of all IPOs.

Honk Bond Market Health Check Art-14Source: Tracy Alloway, on Twitter

And as it turns out, the corporate living dead or “zombie companies”, according to BofA, as a share of the global total is 13%. 13% of companies in advanced economies are unable to make interest payments without borrowing.

Honk Bond Market Health Check Art-15Source: CNN

It is scarce comfort knowing that Singapore’s “zombies” are nearly flushed out of bond markets, with just Hyflux left although we cannot be sure if fraud continues to pop up, like the problem SGX has with this Best World for misrepresenting their Chinese assets, this week.

On the default count, and including the exchanged bonds, it has been over SGD 4 bio, thanks to Hyflux for ratcheting the number up by SGD1.35 billion although the perpetuals are not in default status yet. Here is a little tombstone for the fallen names since 2015.

Honk Bond Market Health Check Art-16List of companies that have defaulted or restructured in the Singapore bond market (unverified for accuracy).

Honk at Every Little Thing

Except for the ugly overhang of the Hyflux default which is a rather big overhang, everything else has been rewarding close calls this year and mortgagee sales do not typically hurt the developers, which is a good thing.

The Singapore market continues to lug along but it does pay to be vigilant and to honk preventively, especially when driving down Kim Seng Road in the mornings like we will do. Who knows, we may even save a life?