S&P sees more turbulence looming in Singapore bond market

SINGAPORE - Recent turbulence in Singapore's corporate bond market is unlikely to subside in the next 12 months at least, according to ratings agency Standard & Poor's, which believes defaults or distressed exchanges are unlikely to remain concentrated in the energy and commodity sectors following falling prices.

The troubles faced by Indonesia-based mobile-phone distributor and retailer PT Trikomsel Oke Tbk. and Hong Kong-based industrial fishing company Pacific Andes Resources Development Ltd. (PARD) highlight the widespread nature of the problem in Singapore's bond market,” S&P says.

“Both companies operate in the consumer sector, which is commonly seen as a defensive industry.”

In a filing to the Jakarta Stock Exchange on January 4, Trikomsel confirmed that its obligations to pay its creditors will be suspended while it works out a restructuring. “This was reported to be the first default in the Singapore bond market since 2009,” S&P says.

“The market may see its second default in less than three months as PARD may not honour some obligations on its 8.5%, Singapore dollar (S$) 200 million notes due 2017.

“In a Singapore Stock Exchange filing on January 10, the company disclosed that it had received a letter from bond trustee HSBC Holdings PLC alleging breaches on the bonds' terms. The bonds' next coupon payment is scheduled for January 30.

"In an active search for yield, Singapore investors have turned to riskier bonds over the past seven years. This trend was shaped and fuelled by low interest rates since the global financial crisis and the absence of corporate defaults," says S&P credit analyst Bertrand Jabouley.

"This has allowed lesser known companies with weaker capital structure, earnings profile, track record of operations, and sometimes substandard information disclosure to access the market, generally with unrated bonds."

According to estimates by Standard & Poor's and Bloomberg, rated bonds stood for less than 15% of corporates issuances, both in terms of volume and value, over 2010-2015.

"In an environment of tumbling consumer sentiment, Asia-Pacific companies have often compromised on prices to push volumes, putting earnings and hence debt repayment capacity under pressure," says Jabouley.

"Debt has grown rapidly, sometimes with a short-term bias, and earnings growth has lagged.

“For instance, PARD's reported debt nearly tripled between September 28, 2010, and September 30, 2014, to HK$ 14.6 billion, while EBITDA increased by only 50%.

“In addition, a growing number of firms with operations outside Singapore have found it attractive to raise debt in Singapore dollars rather than borrow in their domestic markets.

“Those companies are now paying the price of past opportunistic funding and a currency mismatch between cash flows and debt servicing costs.”

There are currently close to 400 issues outstanding in the Singapore corporate bond market (excluding Government agencies), says S&P, with bonds worth about S$5 billion coming due this year and S$8 billion more in 2017. www.standardandpoors.com (ATI).