Corporate bond market to be 'stagnant or lower'

OCBC report notes lower investor appetite but expects activity from banks, S-Reits and in retail bond market

The market for Singdollar corporate bonds will be "stagnant or lower" this year than in 2015 due to the weaker economic outlook and increasingly picky investors, said OCBC Bank yesterday.

Singdollar bond issuances came in at $21.3 billion last year, down from $23 billion in 2014.

OCBC noted in a recent report that investors will seek bonds from high-quality issuers, with a preference for shorter-dated paper, given rising interest rates.

It also noted that investors have less appetite for riskier offerings amid the weaker economy and market volatility, a trend that may crimp demand for high-yield issuers.

"Private bank demand in particular has progressively slowed as investors became more focused on credit fundamentals rather than on returns," noted OCBC.

Issuers' demand for funding may also dwindle as companies shelve investment plans in view of the weaker growth prospects.

But OCBC expects investment- grade issuers to be more willing to tap the market this year, citing banks and Singapore-listed real estate investment trusts (S-Reits) as likely candidates. It noted that S-Reits could issue bonds to manage their gearing levels and shore up balance sheets for growth.

Banks could also be "strong issuers in the Singdollar space, given their rising capital requirements and phasing out of old-style capital instruments", OCBC added.

Last year, banks accounted for 24.4 per cent of total issuance, compared with 14.8 per cent in 2014. That included Julius Baer's landmark $450 million additional tier 1 deal in November.

In addition, there will be opportunities for new bond issues, spurred by refinancing needs. Last month, OCBC told a briefing that it estimates $13 billion in Singdollar bonds and US$33 billion (S$48 billion) in Singapore syndicated loans will likely mature this year.

The bank said the retail bond market could also see some activity this year, given the "warm response" to issuances last year. Upcoming changes to legislation that would make it easier for corporates to offer such bonds could help demand.

The four retail bonds offered last year - from Oxley Holdings, Perennial Real Estate, Aspial Corporation and Frasers Centrepoint - were oversubscribed and were issued beyond their original offering sizes.

"With market sentiment weak and the economic outlook clouded, issuers and book runners will need to work harder to get deals done as was the case in the second half of 2015 for higher-yielding names," the report noted.

The bank noted that some riskier issuers have sought "covenant relief", referring to the solicitation of consent from bondholders to amend covenants or change the terms of the bond. It said nine issuers sought approval to amend covenants last year, six of which were energy sector-related issuers.

Given the challenging conditions, OCBC advised that investors focus on shorter-dated names with "solid market positions, cash flow stability or clarity, as well as ongoing access to liquidity".

A version of this article appeared in the print edition of The Straits Times on January 15, 2016, with the headline 'Corporate bond market to be 'stagnant or lower''. Print Edition | Subscribe