Singapore’s Yield-Starved Investors Are Buying Riskier Bonds (May 2013)


Source: Reuters – Singapore investors warm up to small-cap bonds

Notable excerpts:

Singapore’s yield-starved investors are buying riskier bonds in a move that is allowing many of the city’s smaller companies to issue debt for the first time.

Auric Pacific Group, best known as the owner of food courts offering cheap meals to Singapore’s workers, is set to join a growing number of small and mid-cap companies hoping to appeal to fixed-income investors when it serves up its first offering from a S$500m debt programme.

While Auric’s share price has doubled over the past 12 months, its market cap of S$161m (US$131m) makes it one of the smallest companies to attempt a bond sale. It is, however, far from the only issuer to spot an opportunity.

Persistently low interest rates in Singapore are forcing investors to look beyond investment-grade bonds, with at least five small and medium-sized enterprises completing local debuts since March. The five-year benchmark government bond was yielding 0.49% on May 9, while consumer prices in March were up 3.5% on the previous year.

Oxley Holdings, a mid-cap property developer, provided the latest indication of that hunger for yield on Wednesday with a S$150m (US$123m) 5.1% bond that attracted orders of more than S$1.7bn.

Hong Fok Corp, another developer, had already offered evidence of the trend. The issuer attracted orders in excess of S$320m for its S$120m six-year 4.75% debut in March. Raffles Education, another small-cap, has come to market twice this year via a S$80m 5.80% three-year deal in February and a S$50m 5.90% five-year in late April.

Companies of Oxley’s size have traditionally relied on Singapore’s bank loan market, while the city’s fixed-income investors have tended to prefer rated, investment-grade issues or companies with larger market capitalisations.

The rush of financings from these smaller companies, however, shows that dynamic is changing.

The enthusiastic response to this year’s high-yield deals shows that fixed-income buyers are moving down the credit curve in search of higher returns. While that allows companies to improve their funding flexibility and access a wider investor base, it also raises the risks for the local fund managers and private bank clients who buy the debt.

Singapore bond buyers are more accustomed to studying the credit risk on large, frequent issuers such as the state-backed National University of Singapore, but many of those large-cap companies pre-funded much of their 2013 needs when borrowing rates plunged last year.

Moving down the credit curve comes with an obvious appeal. While Oxley paid 5.1% on its bonds, NUS – one of the few investment-grade issuers in the Singapore dollar market this year – priced a five-year bond in January at a yield of 1.028%.

Should interest rates remain near historic lows, Auric, which owns Singapore food court chain Food Junction and produces the locally popular Sunshine brand of bread, is unlikely to be the only one to find hungry investors queuing up for more.


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