* Private banks lead hunt for high-yield assets
* Wealthy investors see few alternative investments
* Inflated order books may distort risk pricing
By Kit Yin Boey
July 11 (IFR) - Private banks are driving Singapore's bond
market to new heights as wealthy individuals clamour for higher
Pacific International, a highly leveraged, unlisted shipping
company, this week became the latest new issuer to benefit from
this apparently insatiable appetite, when it sold a S$300m
(US$240.8m) 5.90% unrated three-year bond that attracted S$3.5bn
of orders from 93 different buyers.
Pacific already has US$2.95bn of debt and an annual interest
bill of around US$81m. Despite a weak outlook for the
competitive shipping industry, private banks acting on behalf of
their clients bought 93% of the deal.
This was by no means the only bond to have drawn a crowd in
recent weeks. Smaller listed companies have also pulled in big
oversubscriptions. A S$75m 4.75% 3.5-year issue from
construction company Tiong Seng Holdings received
S$650m of orders, while property developer Singhaiyi Group
pulled in S$800m for a debut S$100m 2.5-year at a
Surging appetite for yield is allowing more companies to
come to the capital markets, giving some in difficult sectors
such as Pacific International additional flexibility compared to
bank loans. While the additional demand adds to market
liquidity, however, market participants worry that inflated
order books may be distorting pricing and leading to a build-up
of credit risk.
"The private bank clients are adamant about getting their
hands on the bonds because they know how hard it is to pick them
up in the secondary markets," said a debt syndicate banker.
"The PBs (private banks) inflate their orders to ensure they
get at least 10% of those orders, and that just balloons the
entire book. Once you see a deal that is more than three times
oversubscribed, you can be sure the rest is inflated."
A giant order book typically allows a company to push for a
reduced cost of funding. Pacific International, for example,
squeezed the final yield on its bond by 35bp to 5.90%, a
High-net worth individuals are turning to high-yield bonds
after a choppy period for the city's stock market and government
restrictions that have curbed speculative property investments.
Cash rates are low, and the yield on the 10-year Singapore
government bond is only 2.3%.
"Yields are very low and cash returns are next to nothing,"
said a Singapore-based debt syndicate banker. "Investors have to
re-channel funds somewhere, and they pick high-yield bonds as
the returns can sometimes match up to equity dividend yields."
Investors also are positioning their portfolios in
anticipation of rate increases. High-yielding bonds, even those
with short tenors, provide them with a yield buffer compared
with high-grade bonds, which are too sensitive to rate
The robust demand has pushed up new issues in the secondary
markets as well, as Singapore's mainly buy-and-hold investors
chase bigger allocations.
Koh Brothers Group, an investment holding
company, sold a S$50m 3.5-year bond at a 4.8% yield in mid-June
and within a week the yield firmed to 4.4%. The yield on a
S$100m two-year bond from Vallianz Holdings narrowed
to 5.96% earlier last week from 7.20% when the bond priced in
Singapore's wealthy individuals are also enticed by private
banks that will lend up to 80% of the cost of their bond
purchases, although a banker from one local bank said they would
only provide leverage up to 60%.
Robust market liquidity has brought more issuers to market,
and pushed issuance volumes up in the first half of this year,
mostly since May. A total of S$11.4bn of bonds were sold up to
July 3, up from S$9bn issued over the same period last year.
Despite the lack of high-grade issuers this year,
institutional fund managers have latched on to a lucrative
trend. In the past, private banks were perceived as the first to
sell once their holdings turned a quick profit. But real money
accounts have joined the game by selling their allocations to
under-allocated private banks in the secondary markets, often
earning a tidy sum.
(Reporting By Kit Yin Boey; Editing by Steve Garton)