Singapore's yield-starved investors are buying riskier bonds in a move that is allowing many of the city's smaller companies to issue debt for the first time. Auric Pacific Group, best known as the owner of food courts offering cheap meals to Singapore's workers, is set to join a growing number of small and mid-cap companies hoping to appeal to fixed-income investors when it serves up its first offering from a S$500m debt programme.
While Auric's share price has doubled over the past 12 months, its market cap of S$161m (US $131m) makes it one of the smallest companies to attempt a bond sale. It is, however, far from the only issuer to spot an opportunity.
Persistently low interest rates in Singapore are forcing investors to look beyond investment-grade bonds, with at least five small and medium-sized enterprises completing local debuts since March. The five-year benchmark government bond was yielding 0.49 percent on May 9, while consumer prices in March were up 3.5percent on the previous year. Oxley Holdings, a mid-cap property developer, provided the latest indication of that hunger for yield on Wednesday with a S$150m (US $123m) 5.1percent bond that attracted orders of more than S$1.7bn.
Hong Fok Corp, another developer, had already offered evidence of the trend. The issuer attracted orders in excess of S$320m for its S$120m six-year 4.75percent debut in March. Raffles Education, another small-cap, has come to market twice this year via a S$80m 5.80percent three-year deal in February and a S$50m 5.90percent five-year in late April.
Companies of Oxley's size have traditionally relied on Singapore's bank loan market, while the city's fixed-income investors have tended to prefer rated, investment-grade issues or companies with larger market capitalisations. The rush of financing from these smaller companies, however, shows that dynamic is changing.
"In a sense, the loan desks are now competing with the debt capital markets desks for business from these small companies," said one loans banker.
Alongside Auric, companies including Tuan Sing Holdings, Nam Cheong and Tat Hong Holdings are gearing up for their first bond sales after setting up MTN programmes in the past few weeks. The biggest of those, crane leasing company Tat Hong, has a market cap of US $744m. The enthusiastic response to this year's high-yield deals shows that fixed-income buyers are moving down the credit curve in search of higher returns. While that allows companies to improve their funding flexibility and access a wider investor base, it also raises the risks for the local fund managers and private bank clients who buy the debt.
Singapore bond buyers are more accustomed to studying the credit risk on large, frequent issuers such as the state-backed National University of Singapore, but many of those large-cap companies pre-funded much of their 2013 needs when borrowing rates plunged last year.
Moving down the credit curve comes with an obvious appeal. While Oxley paid 5.1percent on its bonds, NUS - one of the few investment-grade issuers in the Singapore dollar market this year - priced a five-year bond in January at a yield of 1.028percent.
Meanwhile, the yield on the five-year Singapore government benchmark hit a record low of 0.31percent in January and was still below 0.50percent on May 8. The 10-year benchmark dropped below 1.50percent for the first time in 2012 and was at 1.47percent on May 8, close to last December's record low of 1.29percent. Such low interest rates have made the bond market competitive even against cheap bank debt from Singapore's deposit-rich lenders.
Senior unsecured bonds also offer greater operational flexibility over bank loans, where smaller borrowers are often required to pledge assets as security or collateral against the debt.
"This allows SMEs to diversify not only their funding sources but also the structures of their debt portfolios," said one Singapore-based banker.
The added flexibility has a cost, though. Small companies pay a premium of some 50bp-100bp for the unsecured structures, although bankers argue the benefits of bullet repayments and flexibility outweigh the additional cost.
Should interest rates remain near historic lows, Auric, which owns Singapore food court chain Food Junction and produces the locally popular Sunshine brand of bread, is unlikely to be the only one to find hungry investors queuing up for more.
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