DBS Bank Ltd. predicts as much as S$10 billion ($7.9 billion) in covered bond sales by banks in Singapore over the next three years as the world’s most-expensive city prepares for tougher times.
“These instruments provide an alternative funding source that has exhibited stability in times of stress,” Colin Chen, head of structured debt solutions at the unit of Southeast Asia’s biggest lender, said in an interview. “The first Singapore covered bond is likely to be in a foreign currency because there’s already good access to Singapore dollars.”
Singapore released guidelines in December to permit the nation’s banks to sell covered bonds, which are typically higher-rated and lower-yielding than unsecured debt because they are backed by assets that remain on lenders’ balance sheets. The securities could boost debt issuance by Singapore’s lenders, which sold the equivalent of $22.8 billion of notes in the three years through 2013, data compiled by Bloomberg show. Hong Kong banks sold $57 billion of bonds in the same period.
The Monetary Authority of Singapore is attempting to boost the nation’s slowing economy while maintaining curbs on property values after home prices rose to a record in the past five years. Covered bonds typically pay less than senior debt, yielding an average 1.2 percent versus 2.5 percent on global financial notes. The risks of off-balance sheet financing were highlighted during the global financial crisis when defaults on U.S. subprime mortgages surged.
Covered bonds are guaranteed by the issuer and have a designated pool of assets which can be used to meet payments if it can’t. The global market for the securities, which were pioneered in 18th-century Prussia, was worth 2.8 trillion euros ($3.9 trillion) by the end of 2012, up from 1.5 trillion euros nine years earlier, according to the European Covered Bond Council lobby group. Lenders in Singapore have yet to sell the notes, data compiled by Bloomberg show.
Singapore topped Paris, Sydney and Tokyo to lead a global ranking of the most-expensive cities, the Economist Intelligence Unit said this month in its Worldwide Cost of Living Survey. Residential values have jumped 61 percent since mid-2009 while annual inflation has averaged 2.8 percent over the last 10 years versus 1 percent in the previous decade, government data and indexes compiled by Bloomberg show.
At the same time, the city-state’s economy is slowing. The export-dependent economy’s overseas shipments slipped in January after falling 10 out of 12 months in 2013. Gross domestic product is likely to expand 3.7 percent this year, according to a Bloomberg survey of 24 analysts, less than the 6.3 percent growth for Asia as a whole.
Singapore’s currency gained 0.2 percent against the dollar this month, lagging a 2 percent gain in the Indonesian rupiah. The nation’s 10-year government bonds yielded 2.48 percent as of yesterday, little changed in the period.
“Growth shocks and financial market volatility could affect the property market and the banking system,” the central bank warned in its financial stability review in December. The share of overly indebted households may rise to as much as 15 percent if mortgage rates should increase by 3 percentage points, it said.
Singapore ramped up property curbs last year, publishing new rules that require financial institutions to evaluate a borrower’s existing debt when granting mortgages. Home loans should not exceed a total debt-servicing ratio of 60 percent, MAS said in June. The island has also added new taxes and higher downpayments for home buyers during the last five years.
The measures seem to be having an effect. Singapore’s home sales slid 72 percent in January from a year earlier, marking the slowest start to a year since 2009, according to government data. The property market is stabilizing and the country isn’t facing a credit bubble that puts its banking system at risk of a crisis, the central bank said Jan. 15.
“Everyone has exposure to the real-estate sector in Singapore, but the three big banks are in pretty good shape,” said Kaushik Rudra, the Singapore-based global head of credit research at Standard Chartered Plc. “Investors will definitely have interest in covered bonds if they are issued out of Singapore, because typically the first batch of a new product is priced to sell.”
Governments from Australia to South Korea have introduced covered bond rules since the financial crisis to facilitate borrowing by their banks.
The notes are expected to be a “critical tool” for South Korean banks in times of crisis, Kwon Dae Young, director of the banking division at the Financial Services Commission said in a Jan. 28 interview in Seoul, after the nation passed a law to facilitate issuance late last year. Australia allowed sales in 2011, with then-Treasurer Wayne Swan saying they would offer cheaper and more stable funding.
Singapore’s lenders could have scope to issue as much as $25 billion of covered bonds under rules that limit the amount of assets backing the debt to 4 percent of a bank’s total, according to a January report from Barclays Plc. Issuers must send details of their program to the central bank one month before a sale and notify it three business days before the offering.
The city-state’s first sale is likely to be denominated in U.S. dollar or euros, according to Praveen Jagwani, the Singapore-based chief executive of UTI International Ltd., which manages about $2.1 billion as a unit of India’s UTI Asset Management Co.
“A lot of our Japanese institutional clients are actively looking at covered bonds as they want to diversify,” said Jagwani. “For an inaugural issue you want some of the steady investors from Europe to participate and you don’t want to completely eliminate that investor set by launching a Singapore-dollar issue.”