Take away the cost of houses and cars (all paid up), inflation in Singapore is quite well controlled - for political reasons: thankfully the cost of chicken rice can still be only $2.50 at some stalls.

Companies & Markets
HOCK LOCK SIEW; Reits may have higher yields but Reit perps' payout more certain
Lee Meixian

30 September 2020
Business Times Singapore
STBT
English
© 2020 Singapore Press Holdings Limited
WHY would investors buy perpetual bonds (perps) issued by real estate investment trusts (Reits), when the Reits themselves would deliver higher yields?

Case in point: Earlier this month Ascendas Reit, which is currently yielding 4-plus to 5 per cent, priced and sold its S$300 million green subordinated perpetual securities at an initial annual distribution rate of 3 per cent.

The eventual take-up by investors was split between institutionals at 80 per cent and high net worth individuals at 20 per cent. Yeow Kit Peng, head of capital markets & investor relations for Ascendas Reit, said this attests to the strong demand for the issuance.

Similarly, in August, Aims Apac Reit priced and sold S$125 million of perpetual securities at 5.65 per cent. The Reit itself is currently yielding 7-plus per cent, with a 12-month forward yield of 8.1 per cent.

Edmund Leong, head of group investment banking at United Overseas Bank, the sole dealer of the issue, said the perps pay a lower coupon when compared to the Reit's dividend yield for unitholders because perp holders rank ahead of Reit unitholders as creditors in a liquidation scenario.

In addition, the fixed coupons of perps are paid with more certainty every six months and can only be deferred in a non-cumulative manner if the Reit stops paying dividends altogether on its units.

Reit managers, on the other hand, have full discretion over how much dividends should be paid to unitholders. Although Reits need to pay out 90 per cent of their income to qualify for tax transparency, some new measures have recently been introduced offering Reit managers flexibility to deal with the pandemic.

Non-Reit issuers

The more attractive perps by comparison, however, could be those issued by non-Reit players.

"For example, Hotel Properties has been paying a higher distribution rate for its perp than (the dividend yield of its stock)," noted Wong Hong Wei, a credit research analyst at OCBC Global Treasury Research and Strategy.

"With the outbreak of Covid-19 impacting businesses, it is likely that dividends, and hence dividend yields, may not stay the same."

Generally speaking the price of perps tends to more stable than for equities, he added.

But there are risks to perps as well given that the underlying exposure from investing in perpetuals versus investing in stocks is completely different. Equity holders enjoy upside when a company does better, while the upside for perpetual holders is capped.

"I am inclined to think that perpetuals behave more like equity when times are bad," said Mr Wong, referring to how perpetuals can lose their bond-like features - such as having a maturity date and providing a fixed-income stream - in bad times.

This is because issuers may exercise prudence by not calling their perpetuals.

That has already happened this year. Both Ascott Residence Trust and Wing Tai Properties, in June and August this year, respectively, chose to miss the call of their perpetuals, because spreads had increased significantly due to Covid-19.

As a result, perpetuals can become a cheap form of equity to issuers, and it may make sense for issuers to keep them in their capital structures permanently, Mr Wong said.

Trevor Chuan, partner of debt capital markets practice at WongPartnership, added that legal characterisation aside, it helps to remember that a perp remains in essence a fixed income instrument.

"Its performance is much more aligned with that of a bond, and while there is an inverse relationship between bond prices and the movement of interest rates, one does not typically expect to enjoy capital appreciation from such instruments, unlike in the case of a stock."

Apples and oranges

Other examples of non-Reit perp issuers whose perpetual coupons were higher than their dividend yields at the point of pricing include Frasers Property, Wing Tai Holdings and CapitaLand, said Clifford Lee, DBS Bank's head of fixed income.

"In some cases, there are unlisted corporates who may not have the history of paying ordinary dividends, like ST Telemedia and ARA Asset Management," he added. The latter company delisted from the Singapore Exchange in 2017.

In the case of unlisted companies, perps could be investors' only options of gaining exposure to such companies' growth.

Proxy bonds

Mr Lee added that Reits differ from other corporate issuers in that Reits themselves already behave like "proxy bonds" with more dependable dividend payouts because of their regulatory obligations.

Theoretically, they are expected to be less volatile instruments because of their rental business models. But this also means that their chances for capital appreciation are lower, compared to other issuers which might be growth stocks with greater upside potential through price inclines.

Chan Fook Leong, executive director of advocacy at CFA Society Singapore, said that while the drama surrounding Hyflux's perpetual securities may have dampened appetite for this asset class, the bond-like stable yields of perps still appeal to a class of middle-aged investors in this low interest rate and volatile environment.

In essence, perp investors are looking for something completely different from equity investors.

Some perp investors also boost the return on their instruments using leverage.

Ms Yeow of Ascendas Reit said private banks do offer leverage to their clients, which can help to boost returns on the perps compared to what an all-cash investment would yield.

Of course, loans are offered to different levels for different clients based on the banks' risk assessments, and investing using leverage has inherent risks. But yield-hungry investors certainly have plenty of options. In the current environment, perps are one of them.

Singapore Press Holdings Limited

Companies & Markets
Singapore's corporate bond issuance stays robust amid low interest rates
Claudia Tan
27 May 2021
Business Times Singapore

© 2021 Singapore Press Holdings Limited

In addition, demand for corporate debt is expected to remain strong even with the prospect of rising inflation and bond yields: fixed-income experts

Singapore

BOND issuance by Singapore-listed companies has gathered pace this year as firms continued to take advantage of ultra-loose monetary policy and historically low interest rates amid the ongoing pandemic to raise funds.

In addition, demand for corporate debt is expected to remain robust even with the prospect of rising inflation and bond yields, say fixed-income experts.

Corporate bond issuance among Singapore listcos jumped 63.7 per cent to S$19.35 billion from S$11.82 billion the previous year, according to Bloomberg data. The momentum has continued so far this year; as at May 25, bond issuance in the same space surpassed S$10 billion year-to-date.

While the onset of the pandemic last year caused severe turbulence in global bond markets, things calmed down when global central banks stepped in to provide liquidity and maintain the flow of credit to households and businesses.

The year-on-year change in corporate debt issuance tends to be inversely correlated with benchmark rates (see graph), according to Tan Chu Ren, fixed income analyst, Bondsupermart Team at iFast Financial. When the five-year Singapore-dollar swap offer rate declines, corporate debt issuance tends to increase shortly after, and vice versa.

Corporate debt issuance has also consistently been in the positive region during periods of low interest rates, Mr Tan added.

Phillip Securities bond analyst Timothy Ang said that the increase in corporate bond issuance is part of the efforts by listcos here to tap lower funding rates, as well as to refinance maturing debt.

"SGX listcos are issuing bonds at cheaper rates relative to their existing bond rates, and at relatively longer tenures to lock in the rates for a longer period," he noted.

For instance, Singtel's wholly-owned subsidiary Singtel Group Treasury, had in April priced S$1 billion of subordinated perpetual securities. Singtel said that its order book closed after receiving interest of about S$2.1 billion, resulting in an oversubscription. This 10-year non-call 3.3 per cent perpetual has the longest tenure among existing Singtel bonds.

"Demand was healthy and its yield is trading very tightly or expensively to its comparable senior bonds," said Mr Ang.

Companies could also be locking in rates given that economic recovery is underway.

"Many believe that recovery is in sight, aided by the rapid rollout of vaccines," said John Kuong, assistant professor of finance at Insead.

Recent remarks by the US Federal Reserve also signalled that there could be tightening of monetary policy. Fed chairman Jerome Powell said in April that the US economy is at an "inflection point".

Companies might therefore view the current interest rate environment as an opportune time to "build up financial capacity" in order to "expand in full speed during the foreseeable recovery", according to Prof Kuong.

"Some companies that are in secular growth sectors such as industrial, manufacturing and technology need to raise funds to finance their growth expansion plans," said Edmund Leong, managing director and head of group investment banking, UOB.

Tapping the bond market also serves to diversify the investor base for issuers. "With debt financing, they could then use banking facilities to support event-driven situations such as acquisition bids or working capital needs in other jurisdictions," explained Mr Leong.

The sectors that are likely to note the most debt issuance involve two different spectrums, according to iFast's Mr Tan. They either include sectors most adversely impacted by the Covid-19 outbreak such as consumer discretionary, energy and industrials or those sectors that have fared well such as tech and consumer staples.

This year's blockbuster issuance will include Singapore Airlines' recently-proposed additional fund raising exercise to raise S$6.2 billion via mandatory convertible bonds. This is despite the national carrier posting a smaller year-on-year quarterly loss of S$661.7 million for the three months to March.

SIA chairman Peter Seah had said that the liquidity will strengthen the group's financial position during uncertain times while providing resources to "position the SIA Group for growth and leadership".

Real estate investment trusts are also a major issuer of corporate bonds, especially perpetual bonds.

"This helps to improve their gearing ratios as perpetual bonds are accounted as equity on the balance sheet rather than debt," said Mr Ang.

Even as fears of interest rate hikes have pushed US Treasury yields higher, market watchers are expecting the demand for corporate bonds to sustain.

As at May 25 5.30pm SGT, the yield on the benchmark 10-year US Treasury stood at 1.59 per cent, up from under one per cent at the start of the year.

Mr Ang said that there is still a healthy demand despite high inflation expectations and lower bond yields. But this will be centred around investment-grade or issuances from stronger names, for instance Temasek-linked listcos. "Their valuations are historically elevated, but we don't see demand waning. One key reason is their ability to get better rates from investors," he added.

On the other hand, lesser-known firms may resort to bank loans given the low borrowing cost.

Meanwhile, UOB's Mr Leong expects more infrastructure businesses to tap the debt market to issue longer-term bonds to match the sector's asset life cycle. In this regard, he expects robust investor demand for green and sustainability-linked bonds, particularly to fund projects in the renewables space.

Even so, some observers do not rule out the possibility of corporate debt issues slowing down on expectations that central banks may taper economic support and turn off the tap on easy money as a result of inflationary pressures.

"For Singapore, we may see a similar trend but we may have to rely on domestic economic conditions, movements in the benchmark rates and the cost of borrowing Sing dollar deposits for a directional read on future borrowing rates, rather than examining US labour data," said iFast's Mr Tan.

It will then boil down to whether corporates choose to raise capital through the issuance of loans, debt or equity.

"When inflation rises, corporates that can pass on higher costs to consumers are also in a better position to borrow at higher interest rates. Such businesses may be in the consumer discretionary sector such as automobile companies," said Mr Tan.

Singapore Press Holdings Limited

Tq for all your replies, bro,... Yes, I'm already into USD FDs with DBS. But,... how do you buy the US Corporate Bonds ?

" Here I show an example of the 2.4% AAPL bond due on 20230113. "

Bro,... if the coupon rate is 2.5%, I might as well put into DBS USD FD's today which yield me close to 3.6% for 1-mth tenure, interest deposited every mth-end,..

Why go for a 2.4% p.a. return and have capital loss risk too ?

I know abt YTMs, and all.

Since you did not put down the price of the AAPL bond in your above input, I presumed it is fixed-price. Hence, I just computed by using the 2.4% indication.

We don't normally call it 'instance of issuance'. We call it PAR VALUE.

Look at my input for the Frasers Green Bond,... it talks abt the current coupon rate at a price which is currently below par value.

I don't like to use the Term : Yield-to-Maturity (YTM). Maturity can be extended dependant on the terms of the bond.

Edit : You shld buy more bonds to take advantage of bond returns in a rising interest rate environment. Use the practical terms outside,... not the book terms from the financial analysts.

I saw some solid news today abt China being really keen on opening-up,... I think,... I'll skip T-Bills-lar,...

Standby my money for China-related instruments.

But I'll chase the SSB.

probably doesn't matter... goes to same tradeweb marketplace...

under smart... you can further configure your routing options... these affects the fees you pay...

ibkr won't know how your order(s) will be split/taken up until its execution... so will give you a range of fees in the preview page

you can manually select all the individual market to try see which give you the 9...

I did this when I sold my shell... because it can be routed to so many exchanges throughout Europe... so wanna make sure I paid the lowest fees... for US products, usually the marketplaces are quite limited...