* 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 returns.
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 5.25% yield.
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 considerable saving.
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 increases.
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 March.
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)