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Singapore fighting for HK's crown

26 Jun 2007

Hong Kong and Singapore are often touted as having the most developed local currency bond markets in Asia. The two countries have made great strides in the past years. But many practitioners are still not satisfied with the progress and hanker for further developments. Tanya Angerer reviews the advancements that have been made and the prospects for growth.

Visitors to Hong Kong and Singapore inevitably make comparisons between the two countries. Both claim to be the financial hubs of Asia and are often rivalling to attract foreign investors and companies. In almost every single aspect, from licensing to tax laws, the two have been throwing punches at each other. So there is no great surprise that this fight extends to their local currency bond markets.

Comparing the two centres’ volumes, however, does not show Singapore in a good light. The Hong Kong market firstly, is much bigger. According to Dealogic, outstanding Hong Kong dollar bond issuance since 2000 is $77.8bn, while Singapore is only at $37.6bn. But the growth of Singapore’s dollar bond market is definitely commendable. In 2003, volume of issuance was at $3.5bn but by 2006, this number had ballooned to $6.5bn.

"The Singapore dollar market definitely has great potential and the growth rate will probably surprise a lot of players," says Frank Kwong, head of Asia debt syndicate at BNP Paribas in Hong Kong.


If one looks more closely at the numbers, issuance in Singapore this year to June 18 has increased by 11% year-on-year, whereas for Hong Kong during the same period, the volume of issuance dropped by 40%.

Digging beyond the protracted struggle between the two cities, one finds a number of similarities. Both have high short term liquidity and regulations that support cost-effective MTN programmes. And both countries have also been successful in luring foreign corporates as issuers.

In October last year, the Central American Bank for Economic Integration (CABEI) became the first entity based in Latin America to launch a deal in the Hong Kong dollar market. HSBC, which was the bookrunner, arranged the HK$750m five year deal from the A2/BBB+ supranational development bank’s EMTN programme.

"The inaugural CABEI Hong Kong dollar issue encouraged investors to look beyond the usual issuer universe and encourages other quality borrowers to tap the market," says Gina Tang, head of debt capital markets at HSBC in Hong Kong.

There was also the HK$750m of 4.3% five year notes issued by the Government of Quebec in January this year.

"We are seeing a more diverse range of issuers in Hong Kong as the market widens its investment parameters," says Sean Henderson, head of Asian debt syndicate at HSBC based in Hong Kong.

Frank Kwong, BNP Paribas:
"Around 80% of Hong Kong dollar
issuance is rated single-A and above,
whereas in Singapore they are
sensitive to credit spreads"

However, Kwong at BNPP says that due to the rise in prices some foreign issuers have shied away from the Hong Kong dollar markets.

"Several frequent borrowers such as GMAC, Disney and AIG are not coming to the market as frequently," he says, "as credit spreads have tightened and investors tend to go to banks."

Singapore, meanwhile, has hosted more foreign issuers including Hong Kong’s Sun Hung Kai and Cathay Pacific. Hong Kong’s largest airline returned to Singapore in November last year with a S$400m five year deal via Citigroup, DBS and Standard Chartered after its inaugural Singapore dollar bond in 2005.

Also in November, Sun Hung Kai priced its first Singapore dollar bond. The decision to issue the S$270m three year bond, arranged through Standard Chartered and HSBC, was driven by a desire to diversify its funding.

But some doubt whether this is a long term trend emerging. "Last year, the big curiosity was overseas issuers in the Singapore bond markets but I have a feeling they were more one-time issuers," says Clifford Lee, head of fixed income at DBS, based in Singapore.

The range of foreign issuers in both countries is dominated by financial institutions which are attracted by the efficient pricing they can achieve on a short term basis.

Singapore the brave

In both countries, the sub-investment grade market is underdeveloped and the number of issuers able to go beyond five years is limited, although the problem is more severe in Hong Kong.

"The Hong Kong investors are typically more conservative, buying a larger proportion of very high grade issues," says Henderson.

Most bankers agree that investors in the Singapore local currency bond market are less averse to buying into higher yielding assets when compared to Hong Kong.

"Around 80% of Hong Kong dollar issuance is rated single-A and above, whereas in Singapore they are sensitive to credit spreads," says Kwong at BNP. Paribas "For example, the deal for Emirates worked in Singapore but would be a challenge in Hong Kong. Also structured credit issuance such as synthetic CDOs are more popular in Singapore."

The Middle Eastern airline issued a S$400m five to 10 year private placement via Citigroup, DBS and Standard Chartered last year in June.

Some say that Singapore dollar investors’ ability to look down the credit curve is due to the presence of a larger fund investor community, while others point to macroeconomic factors.

"Absolute rates in Singapore have dropped to near historical lows and insurance companies and fund managers have been struggling to achieve the returns that they need," says Benedict Leh, director of Asia fixed income syndicate at Citigroup. "Hence they have been keener to look down the credit curve."

Paul Au, head of Asia debt syndicate at Citigroup, however, is optimistic that the Hong Kong investor base will soon be more accepting of riskier assets. "Investors expect absolute yields to go up, closing the gap between Hong Kong dollar rates and US dollar rates," he says. "Therefore the desire to look towards more higher yielding assets is becoming more apparent."

On the matter of tenors, bankers have praised the measures taken by the Singapore government to encourage issuers to look beyond the normal maturity range of five to 10 years. In February this year, the government came to the market with a S$2.5bn 20 year paper.

"The issuance pushes the tenors of Singapore dollar bonds out," says Ana Dhoraisingam, head of debt capital markets at HSBC in Singapore. "This allows investors the ability to hedge and encourages more borrowers to look at the longer end of the spectrum.

"However, issuers are still very yield-sensitive and would need to see the benefit of issuing beyond 10 years, and whether the premium paid meet their funding targets."

Ana Dhoraisingam, HSBC:
[on Singapore sovereign debt]
"issuers are still very yield-sensitive
and would need to see the
benefit of issuing beyond 10 years"

The government is also trying to set an example and lengthen maturities in order to encourage project bonds. Several public private partnerships are being awarded this year such as the job to build and run Singapore’s Sports Hub at the Kallang Basin. The sports facility will include a 55,000 seater national stadium with a retractable roof, a 6,000 seater indoor aquatic centre and a public water sports centre. The winner was to be announced by this June but has now been delayed till December.

"Capital markets financing for infrastructure addresses problems associated with the operator such as limitations on operator risk appetite and balance sheet size," said Ng Nam Sin, executive director of the Monetary Authority of Singapore. "Also, tapping the capital markets disintermediates bank lending and enlarges the pool of lenders beyond banks to include pension funds, insurance companies and even retail investors."

One banker mentioned that bidders would definitely gain competitive advantages if they looked at project bonds as a means of funding.

"One of the challenges of going to the capital markets route for project financing in Singapore is that the funding maturity needs to exceed 20 years," says Kenneth Yeo, head of debt capital markets at Standard Chartered in Singapore, "As yet, there has been no benchmark issuance beyond 20 years."

MAS pushes MLA

The Monetary Authority of Singapore has always been committed to developing the domestic bond market and is expected to release legislation soon that will change the amount of cash and liquid assets that a financial institution must hold on its balance sheet. The government intends to expand the range of eligible liquid assets, expanding the definition to include both Singapore government securities as well as rated corporate assets of a certain size.

"There has been increased issuance of rated paper in Singapore in anticipation of minimum liquid assets (MLA) changes expected to be finalised this year," says Dhoraisingam at HSBC in Singapore. "Requests for proposals especially for government statutory boards and strongly rated names have been bid very aggressively in anticipation of these changes."

Leh at Citigroup is in wholehearted agreement.

"The forthcoming MLA changes will allow banks to manage their liquid assets much more proactively," he says. "And we expect issuance activity to pick up materially as a result."

And Yeo at Standard Chartered hopes that this will in turn lead to increased trading activity.

No secondary playtime in Asia

Despite the progress of the Hong Kong and Singapore local currency markets, many still complain about the lack of a secondary market. "The Asian domestic bond market is very good at identifying risk but not as effective at pricing risk," said Lee at DBS. "One of the biggest problems is that Asia is fragmented. After the crisis, the markets closed up and Asian investors and lenders retreated back to their domestic cells. In the present market, intra-Asian currency plays are more difficult.

"The ability to hedge, short and have a play in intra-Asian currencies grounded to a halt. It needs to open up again."

Hands-off Hong Kong

While both Hong Kong and Singapore are hailed as role models for other emerging local currency markets to aspire to, the attitudes of the two nations towards developing their domestic markets could not be further apart. Singapore’s government has always taken a guiding approach and has been instrumental in globalising the local currency bond market, improving pricing transparency through an electronic platform and pushing out tenors. This is opposite to Hong Kong’s laissez-faire approach.

"Hong Kong promotes the market by being hands-off," says Kwong at BNPP. "However in Singapore, as the government increasingly tries to dissect every facet of the market, it almost discourages growth.

"One reason for the slow growth in the Singapore market is documentation is too stringent and administration can be rather tedious. The Singaporean government requires filing of a Return for Debt securities within one month of issuance, and questions include use of proceeds and investor information."

Whether one prefers a more supervised path or not, there can still be no doubt that both markets have made great strides. The liquidity that is available is astounding, and the size of transactions is getting bigger. Specialist investors, which are broadening the investor base, are also taking higher risks in search for yield. Thus there have been more structured, high yield and convertible bonds.

"2007 will be a watershed year for corporate bonds both in local currency and US dollars," says Deepak Kohli, global head of debt capital markets at Standard Chartered, based in Singapore. "Volumes have increased and transaction structures are getting complex and increasingly relevant to clients’ needs."

With the push from Singapore’s government spanning from encouraging project finance deals to the MLA changes, one can only expect a further deepening of the market. And for Hong Kong, the integration of the island to the mainland, where the territory will increasingly act as a platform for Chinese issuers, the future looks bright.

26 Jun 2007