The busiest start to a year on record for Singapore perpetual bonds is belying forecasts that clients of private banks are ready to switch into equities.
Private banks snapped up at least 80 percent of the S$500 million ($397 million) raised by Trafigura Beheer BV, the world’s second-largest metals trader, and Hyflux Ltd., Singapore’s biggest provider of water-treatment services, when those companies sold bonds without a fixed maturity, people familiar said. Just 11 percent of Suntec Real Estate Investment Trust’s S$200 million of six-year notes went to high net worth individuals, another person said.
Perpetual note sales of S$500 million this year-to-date compares with zero for the same period in every year going back to 1999, according to data compiled by Bloomberg. The “great rotation” by investors from bonds into equities has yet to occur, UBS AG, the biggest private bank in Asia, said in a report this month. Perpetuals are popular with rich people in Singapore, Asia’s largest private banking center with offshore assets of about $800 billion, because the higher coupons they offer match those investors’ greater appetite for risk.
“The fact we’ve seen two deals done in quick succession shows there’s more and more confidence in the product,” said Clifford Lee, the Singapore-based head of fixed-income at DBS Group Holdings Ltd., the island’s top-ranked bond arranger since 2008. “There was talk of money going out of fixed income into equities last year but now, the reverse is true. If the market holds up, I definitely expect more perpetuals to come.”
Perpetual bonds typically pay more than those with a set maturity to compensate investors for the risk the notes won’t ever mature and therefore be paid back by the company. They’re generally honored before equity in the event of default and such equity-related features mean the securities can lower a company’s debt-to-equity ratio.
The MSCI Emerging Markets Index of equities closed at a more than five-month low of 916.56 on Feb. 5 amid concern that slowing growth in China and a pullback in U.S. monetary stimulus will sap momentum in economies from Indonesia to India.
Singapore’s Straits Times Index has lost 3.1 percent this year, after falling to a 15-month low on Feb. 5. That compares with an almost 1 percent gain for corporate and government notes denominated in the currency, HSBC Holdings Plc indexes show.
Trafigura sold S$200 million of perpetuals at a yield of 7.5 percent on Feb. 10. Eighty percent were sold to private banks and 84 percent to investors in Singapore, the person familiar with the matter said, asking not to be identified because the details are private. The notes are trading at 99.333 Singapore cents on the dollar after being sold to investors at par, according to Bloomberg-compiled prices.
Netherlands-based Trafigura may issue more bonds to reduce its reliance on the loan market, Laurent Christophe, head of corporate finance and corporate funding at the independent oil trader, said in October, without specifying a time period. “At some point banking capacity will shrink, and that’s when being able to tap liquidity from new regions such as Asia and the U.S., as well as capital markets, is the alternative,” he said in a phone interview.
Hyflux raised S$300 million selling 5.75 percent perpetual notes on Jan. 16, according to data compiled by Bloomberg. Private banks subscribed for 84 percent of the debt and 92 percent of the bonds went to accounts in Singapore. The securities were trading at 100.238 Singapore cents on the dollar today.
“I don’t really think the perpetual bond market is back,” said Danny Tan, a Singapore-based fund manager at Eastspring Investments Ltd., which managed about $97 billion in assets as of Sept. 30. “If it was, pricing would be much firmer in the secondary market too.”
BlackRock Inc. and Templeton Asset Management are among money managers who say shares are cheap after the three-month emerging-market rout.
Blackrock Chief Executive Officer Larry Fink, whose firm is the world’s largest money manager with $4.3 trillion, said in an interview earlier this month that developing-nation equities are attractive because of low valuations relative to the countries’ potential growth rates. Mark Mobius, executive chairman at Templeton, which oversees more than $50 billion, meanwhile said the sell off is approaching its end.
Although perpetual notes may be especially vulnerable to market weaknesses, confidence in the asset class has returned and the market has stabilized, DBS’s Lee said. “In the secondary market, Singapore dollar perpetuals are now able to provide a more reliable reference point for upcoming deals,” he said. “The conversation is now about the re-rotation, basically from equities into bonds.”
Genting Singapore Plc’s S$1.8 billion of undated 5.125 percent notes sold in March 2012 at par were yielding 5.881 percent yesterday after touching a record 6.320 percent in September, Bloomberg-compiled prices show.
Demand has been bolstered by the relative lack of supply of Singapore dollar bonds versus prior years. Note sales total S$2.9 billion since Dec. 31, down from S$3.4 billion the same period of 2013 and S$4.9 billion the same period of 2012, Bloomberg data show.
The 0.98 percent gain in Singapore dollar-denominated securities this year is among the best in Southeast Asia, HSBC indexes tracking the region’s major markets show. Local-currency bonds in Indonesia have returned 0.17 percent, while debentures in Malaysia have returned 0.54 percent. Notes in Thailand have gained 1.14 percent.
“Private bank customers are typically driven by yields,” said Joyce Tan, the Singapore-based head of Asia fixed income at UOB Asset Management Ltd., which managed the equivalent of $35.6 billion as of Sept. 30. “The equity market also didn’t pick up in January as investors had hoped. Instead, there was a sell-off.”