Corporate bond market here may face headwinds

Weak investor sentiment already hurting one firm amid looming interest rate hike: S&P

The Singapore corporate bond market could face some pain over the next year, as rising interest rates and weak investor sentiment take a toll on firms here.

This was the warning sounded by credit ratings agency Standard & Poor's (S&P), which noted that a possible bond default by an Indonesia-based mobile phone distributor could spell further trouble for the corporate bond market here.

On Thursday, PT Trikomsel Oke said that it will form a steering committee to discuss possible restructuring options with noteholders.

The firm, which had two debentures denominated in the Singapore dollar among 6.2 trillion rupiah (S$634 million) of bonds and loans outstanding on June 30, cited weaker market sentiment and a falling rupiah as factors for its woes, reported Bloomberg.

"While the group has substantially met its obligations as they fall due to date, it is becoming apparent that it may not be possible to do so indefinitely," Trikomsel said in a filing on the Singapore Exchange.

If the company does end up restructuring its debt, it will be the first case of default in Singapore since the financial crisis, noted S&P.

"A default in Singapore's local currency corporate bond market is so rare that investors will keenly watch the outcome of Trikomsel's potential debt restructuring," said Standard & Poor's credit analyst Xavier Jean in a report.

"Most of the company's assets are in Indonesia, beyond the jurisdiction of its offshore creditors and the company has sizeable onshore working capital loans from domestic banks. That adds a layer of complexity to the debt restructuring exercise."

But the worry is that the case may not be an isolated one, especially with the looming interest rate hike, weaker investor sentiment and poorer corporate balance sheets potentially pointing to further financial distress, noted S&P.

"Trikomsel's situation suggests that even companies in consumer sectors, widely seen as having sound long-term growth potential, are not immune to financial distress and default risk if they rely on debt for their expansion," said Mr Jean.

"Whatever the outcome, funding costs in Singapore's domestic bond market appear set to rise and investors will become more selective."

OCBC fixed income analyst Nick Wong said that the Trikomsel episode highlighted the risks associated with foreign issuers and that it was important to better understand the foreign exchange risks associated with such bonds.

For the Singdollar local bond market, the offshore marine sector is the one with the most challenges.

"The weak energy environment has driven spending cuts by the oil majors, and this has pressured offshore marine issuers," he said.

"Many have relied on debt-fuelled growth in recent years, and have entered the downturn with aggressive balance sheets."

A version of this article appeared in the print edition of The Straits Times on October 17, 2015, with the headline 'Corporate bond market here may face headwinds'. Print Edition | Subscribe