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SGD perp market to see more issuance

28 Feb 2012

The recent spate of Singapore dollar perpetual issuance is set to continue as Singaporean and Hong Kong issuers look to tap the liquidity provided by investors hungry for yield.

More issuers are expected to come to the Singapore dollar market with perpetual (perp) bond offerings, according to senior debt banker. The trend is driven by buoyant liquidity – from private banks, deposits and corporates – and a desire to pick up yield. Three to five deals are expected to come in the next few months from Hong Kong and Singaporean issuers, according to a senior debt syndicate.

"The reality of the matter is this: there’s lots of liquidity in the system and the market has developed to a stage where secondary market liquidity has picked up quite dramatically too," said Clifford Lee, head of fixed income at DBS. "From there, there are good grounds to launch perps into the market because without secondary market liquidity we would not be able to convincingly sell a perp."

"You need the secondary market to take you up in case the bonds are not called and, on top of that, if there are other high yielding instruments in the market then the perp becomes a little less attractive," he said. "But at this juncture interest rates are low, the system is flush with liquidity, and it has opened up in terms of secondary trading. And higher yielding instruments from better known credits have been shown to be a better way for investors in Singapore dollars to deploy cash rather than going down the credit curve to get more yield."

The Singapore dollar perpetual market has seen two deals come to market in the last week with a third currently in marketing. The most recent to price a deal is Singapore Post, which raised SGD350 million (US$277.78 million) on February 24. Olam International sold SGD275 million the day before on February 23. Both companies are first time issuers.

Malaysia’s Genting is meeting investors this week for a potential perpetual bond offering. It has hired DBS and HSBC as global coordinators, with CIMB, Deutsche Bank and J.P. Morgan also bookrunners on the deal.

But not all the deals have been perfect, according to the senior syndicate banker, who thought the Olam deal was too tightly priced. The Olam bonds were sold with a yield of 7% and a 100 basis point step-up at the 10th year and every year after that.

"One clear example of one that's not worked is Olam," said the banker, who was away from the Olam deal. "They're pricing a perp non call five with a step up in the 10th year so people have been looking at where a 10th year Olam is [trading]."

"At 7% for a perp non call five with a step up at 10, there’s not much of a [yield] pickup so that deal was too tightly priced," he said. "Most people thought relative value was around the 8% area."

"But they managed to pull something off," he acknowledged. "It was not the size they wanted - they were talking around SGD500 million when first marketed – so it’s not a great result but a decent result given the kind of pricing they were trying to achieve."

But the SingPost deal fared better, he said, noting that it was trading at 102 on a cash price basis – after pricing at par - when Asiamoney PLUS went to press.

"So as you can see some names – even those that are not Temasek-linked - will do well," said the banker.

"[Singapore dollar liquidity] is coming from deposits, from private banks, from institutions, from corporates and the fact that the Singapore dollar was recently cited as one of the three safest currencies in the world," said Lee of DBS.

But the market is not open to any issuer just yet and will primarily remain the purview of well-known Singaporean and Greater China names that are investment grade, said both bankers.

"Singapore is still very much a high grade familiar name market," said Lee. "For example, if you get an investment grade European name to come over and do a perp it’s still not clear yet [if it will succeed] because a lot of investors have lines only for Asian names and are familiar only with Asian names."

"But more issuers out of Hong Kong and China would be welcome," said Lee. "There is more interest out of Greater China because issuers are savvier and more used to going offshore to tap capital markets."

28 Feb 2012