Singaporean mid-cap companies have responded to private bank demand for yield to become the main issuers into the local currency bond market this summer. They are taking advantage of the absence of larger issuers to diversify their funding with short-dated, small-sized deals.
Since May, local mid-cap companies have issued SGD1.34 billion (US$1.06 billion) of debt, with SGD862.9 million raised through bonds smaller than SGD115 million, according to Dealogic.
These issuers comprise approximately one-third of the total Singapore dollar issuance during this time, compared to just 14.7% in 2012.
“So many of these companies are trying to diversify away from loan funding, but with the sizes that they’re looking to raise in the bond market often put them under the radar with investors,” said a Singapore-based syndicate banker. “But with all the talk of tapering [of the US Federal Reserve’s quantitative easing programme] causing volatility globally, a lot of the Tier I issuers have headed for loans. This has given smaller, Tier II and III companies the ability to tap this market and get their small-sized deals done.”
And the trend is poised to continue. Dealers say that local construction company KSH Holdings and marine, oil and gas maintenance company Mencast Holdings are gearing up for Singapore dollar issues as early as next week. They will follow companies such as Aspial Corp and Goodpack to sell small-sized, short-dated notes to the tune of SGD50 million-SGD75 million.
As only Singapore’s Housing Development Board, UOB and India’s TML Holdings have sold bonds larger than SGD350 million since May, these bite-sized deals have attracted the private banking crowd that would otherwise ignore them in favour of larger from more established issuers.
“It’s all private banks,” said the syndicate banker in response to who is buying these deals. “There have been one or two names in Singapore that have attracted more institutional investors like asset managers, but it’s the private banks that are really buying into these deals now…They have a mandate to invest in Singapore dollar bonds and there’s no one else issuing. It’s all they have right now and that’s appealing for companies that have wanted to sell bonds.”
Among the recent deals is packaging solutions firm Goodpack’s unrated SGD50 million five-year bond with a coupon of 4.15%, sold on July 26. That deals was 37%-invested by private banks. On July 16, jewellery retailer Aspial Corp also priced a SGD50 million unrated three-year bond at par to yield 5%. While bookrunner DBS has not released the investor breakdown for the deal, sources note that private banks were also a key investor base in that deal, and enabled the company to issue a SGD25 million tap one week later.
“Private banks are familiar with their brands because they’re local companies,” said a senior debt banker. “Singaporean mid-caps always had reasonable access to the market, but they’ve been getting a lot more attention this year because the environment hasn’t been conducive for other issuers because prices have widened after June.”
Risk factor
However, while these midcap issuers have received strong interest from private banks, investors still want to be compensated for the risks.
Of the last 10 Singapore dollar-denominated bonds, only the first of these – UOB’s SGD860 million perpetual bond sold July 16 – has a rating, according to Dealogic. And seven of these 10 bonds were issued by domestic mid-cap companies.
While many of these local companies bank on investors’ recognition with their brands and operations – allowing them to skirt a rating - investors including private banks still require a yield pickup to compensate for risks.
“These investors are aware that these companies are smaller and can carry a bit more risk than the big names with ratings,” said a Singapore-based banker. “There are some names that private banks are more familiar with, but overall they’ll be looking for a yield of more than 4%, or even 5%-6% from these issuers depending on their sizes and tenors.”
Dealers estimate that both KSH Holdings and Mencast may issue two- or three-year bonds carrying a 5%-6% coupon.
Further, dealers estimated that the SGD market has become 60 basis points (bp) to 70bp more expensive in recent weeks for these smaller issuers when compared with earlier in the year - an attractive pickup for private banks. And for the issuers, sticking to smaller-sized deals give them the flexibility to refinance either through loans or bonds.
And at the end of the day, KSH Holdings and Mencast may not have the pricing flexibility as some of their peers, but they’re at least able to complete bond deals and capitalise on other issuers’ absence in the market.
“These deals look like they will be very, very small, and are probably comparable to the sizes and tenors of loans that they could get,” said the syndicate banker. “It’s a bit yieldy for them to issue with 5%-6% coupons, but at least they’ll have the opportunity to diversify their funding away from loans where they may not have had this kind of opportunity earlier this year, and may not for the rest of 2013.”