Singapore junk bonds prove resilient to wider turmoil in region

Office worker at Raffles Place, the heart of the central business district on June 3, 2015.
Office worker at Raffles Place, the heart of the central business district on June 3, 2015. PHOTO: ST FILE

SINGAPORE (BLOOMBERG) - Junk bond investors earned twice as much in Singapore as they did in Indonesia this year as private banks sought haven in more developed markets.

US dollar notes from Singapore have gained 7.9 per cent so far this year, the best among regional peers, according to a Bank of America Merrill Lynch index. In Indonesia, Southeast Asia's largest high-yield market, they gained just 3.2 per cent as PT Berau Coal Energy this month took the nation's default tally to more than US$3 billion over the past seven years.

Singapore speculative-grade notes are poised for their best year since 2012 as debt profiles improve and local millionaires prefer the comfort of a home market that boasts a AAA sovereign rating. The debt has proved resilient to wider turmoil in the region, as missed obligations rise in Indonesia and Malaysia's prime minister is caught in a state investment fund scandal.

"The high-yield market has been supported by strong institutional demand, such as the private banks which have recently set up offices here," said Dexter Tan, an analyst at the National University of Singapore's Credit Research Initiative unit. "Credit profiles of local junk-rated listed companies have improved at a faster rate" than Asean peers.

Chipmakers have led the charge. Stats ChipPac Ltd.'s US$611 million of notes due 2018 have returned 4 per cent since Dec. 31, rebounding from a December selloff after Moody's Investors Service cut their rating twice. China's Jiangsu Changjiang Electronics Technology Co. proceeded with a $1.025 billion takeover in June and that triggered two bond redemptions.

In the same period, Global A&T Electronics Ltd.'s US$625 million of notes maturing in 2019 have gained 9.1 per cent. The company won a US lawsuit against some bondholders this month regarding a debt exchange transaction, after Moody's lowered its rating three times since the action started in 2013, to the ninth-lowest junk score.

"Special events drove those bonds higher due to potential takeovers and initial public offerings," Clement Chong, a senior credit analyst in Singapore at NN Investment Partners, said. Concerns about Indonesia and Malaysia also aided Singapore's debt market, he said.

Singapore's economy is showing weak spots. It shrank 4.6 per cent month-on-month in the second quarter on an annualized basis, the most since the third quarter of 2012, as manufacturing contracted. Still, it offers relative calm for investors making bets on speculative-grade assets, Tan at NUS said.

"There's a lot of downside risk priced for Southeast Asian currencies in the context of a Federal Reserve rate hike later this year," NUS' Mr Tan said. The Singapore dollar has been partially protected by a stronger link with the US currency via the exchange rate mechanism, he said.

The Singdollar has weakened 3.3 per cent this year to $1.37 versus the greenback, while the rupiah and ringgit were the biggest losers with a more than 8.1 per cent slump, Bloomberg data show.

The average one-year probability of default for Singapore junk-equivalent companies slid by about 52 basis points, according to Mr Tan. For other Asean firms, the gauge dropped by only about 30 basis points.

Investors in Singapore have prospered amid the 1Malaysia Development Bhd. financial fiasco and the Thai government's fall to a military coup. The Philippines is electing a new president in May and Indonesia's Berau needs to restructure US$950 million of bonds after coal prices slumped.

While domestic dramas in some Asian countries are unlikely to affect sovereign ratings in the next one to two years, they do reduce the likelihood of new structural reforms, Standard & Poor's said earlier this month.

"They could also hurt the responsiveness of the governments to unexpected shocks," the ratings company said.