Singapore Exchange Seeks Infrastructure Bonds as IPOs Slump

Singapore Exchange Ltd., Southeast Asia’s largest bourse operator, is seeking to become a venue for infrastructure bonds as a slump in initial public offerings of shares threatens earnings.

Local-currency debt issuance in Singapore, one of seven nations with AAA ratings and stable credit outlooks, reached a record S$30.7 billion ($25 billion) so far this year, beating an annual high of S$24.7 billion in 2010, according to data compiled by Bloomberg News. The amount raised in Singapore IPOs slumped 62 percent this year compared with the same period last year. SGX reported a 19 percent drop in first-quarter revenue from equities trading.

The prospect of lower borrowing costs may attract regional debt issuers to Singapore, where the average yield on non-government debt is 2.59 percent, according to HSBC Holdings Plc data. Local-currency sovereign bonds in India yield 8.3 percent on average, Indonesia’s 5.9 percent and Malaysia’s 3.45 percent. Asia needs $8 trillion to finance new infrastructure facilities through 2020, the Asian Development Bank estimates.

“There are probably 100 cities in Asia that require a metro, better sewerage and better roads,” Muthukrishnan Ramaswami, president of SGX, said in an interview with Bloomberg News on Nov. 14. “There has to be bond fundraising in Indonesia, Malaysia and India. Those will come here as long as they look for cross-border investors. We’re working towards that.”

Increasing Allure

Bond markets will have to evolve to cater to this growing need for debt financing as bank loans become harder to obtain, Ramaswami said. Bank lending in Asia excluding Japan tumbled 28.7 percent from a year earlier to $207.8 billion so far this year, according to data compiled by Bloomberg News.

Financial institutions such as the ADB and World Bank’s International Financial Corp. are looking at ways to make infrastructure-related bond issues attractive to investors, Ramaswami said. Allowing easier access to capital will help fund $1 trillion of roads and railway projects in India and $12 billion of seaports that Indonesia needs to build by 2025 as it woos foreign investors in Southeast Asia’s biggest economy.

Singapore Exchange wants a bigger slice of Asian bond issuance as revenue from listing fees and IPOs comes under pressure from declining volumes and overseas competition. SGX shares have fallen 31 percent since it began a failed bid in October 2010 to take over ASX Ltd., Australia’s bourse operator.

“Asia has to take on more debt,” Ramaswami said. “The infrastructure funding that is needed for that is enormous.”

Growth Drivers

Since becoming the exchange’s chief executive officer in almost three years ago, Magnus Bocker has been seeking growth drivers as share trading volumes tumbled. Bocker tried to boost equities turnover by introducing American depositary receipts of Asian companies in 2010 and rolling out the world’s fastest trading engine last year. His most ambitious move was the proposed A$8.4 billion ($8.7 billion) acquisition of ASX, which Australian regulators rejected in April 2011.

“He has improved our profile,” Ramaswami said. “Globally, people recognize our strengths a lot more than say five years ago. Five years ago, our challenge was to maintain our internal stability whereas now we have the infrastructure in place.”

Still, SGX’s annual profit has fallen 39 percent since peaking at S$478.3 million in the year ended June 2008 as IPOs slumped. Companies raised $2.7 billion from initial share sales on the SGX so far this year, down 62 percent from a year earlier, according to data compiled by Bloomberg News.

Malaysian IPOs

By contrast, IPOs on Bursa Malaysia raised $6.8 billion this year, near the $7.05 billion record raised in 2010, the data show. Offerings from IHH Healthcare Bhd., a hospital operator partly-owned by Khazanah Nasional Bhd, helped make Kuala Lumpur the world’s fourth-largest center for IPOs in 2012.

SGX’s efforts to woo international companies suffered a setback when Manchester United Ltd., the English soccer team, opted in August to list in New York. Formula One’s stock sale in the city, where it hosts the sport’s first night race, has been put on hold. James Koh, an analyst at Maybank Kim Eng Holdings in Singapore, said bonds may not immediately replace the shortfall from IPOs.

“The size of bond offerings are naturally bigger than those of share sales,” he said. “Bonds are much less liquid than equities. It probably won’t be a significant contributor within the next three years.”

Incentives, Rules

Investor-friendly rules that include tax incentives and dividend payouts of at least 90 percent have allowed real estate investment trusts listed on SGX to become the world’s best performing, returning an average 48 percent this year, according to data compiled by Bloomberg. Singapore now has 28 listed REITs 10 years after the first, CapitaMall Trust, started trading.

To make Singapore a more attractive listing destination, the bourse has allowed stocks and exchange-traded funds to be listed in two currencies since April. Hutchison Port Holdings Trust, which completed an IPO denominated in U.S. dollars in March last year, started trading in both U.S. and Singapore dollars on April 2 of this year. Singapore’s Ministry of Finance said on Oct. 3 it plans to allow companies to issue shares with multiple classes and non-voting rights as part of proposed amendments to the Companies Act.

“Markets are cyclical,” Ramaswami said. “It’s very easy to cut back now and scrimp on investments but then you’re going to be scrambling when markets pick up again. In our case, we won’t be scrambling.”

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