Bond fever grips Singapore's rich

Article in The Edge.

Surely this has to end badly one day, in my humble opinion. Investors in these bonds do not get properly compensated for the relatively high risk that they take. All thanks to people like Greenspan and Bernanke.


(July 11): 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.

Few alternatives
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.