Posted inIndustry views

Higher sector risk after Singapore bond defaults

Asset managers believe that the country’s bond defaults are a concern, but stopped short of saying they would spread outside the energy-related sectors.

More companies are struggling to meet the terms of their Singapore dollar bonds after two oil and gas companies this month sought to extend maturities, Bloomberg recently reported.

Ten firms with Singapore dollar bonds have begun the process of extending the terms of their loan payments compared to eight such cases for the full year 2015, the report said.

Many companies in Singapore have taken advantage of the easy availability and low cost of financing in the last few years to increase their debt loads, Suanjin Tan, senior portfolio manager at Thirdrock Group, who recently joined the firm, told FSA.

“At the same time, given the hunt for yield among investors, the market has not been very good at differentiating credit risk between issuers, leading to many instances of what I believe to be the mis-priced risk.

“As the economic environment deteriorates, there is very little margin of error for certain corporates and hence we are seeing elevated levels of stress in the corporate balance sheets.”

However, he believes the defaults will be contained locally.

“The majority of the issuers in the regional domestic markets continue to be sovereign-related and blue chip corporates, which continue to have ample financing alternatives. There is unlikely to be a contagion effect in the near term.”

China vs Singapore 

Given oil price volatility and the lack of investment in the sector, it will be challenging times for oil and gas companies, Tan said.

“While there might not be outright defaults en masse, I would expect issuers to start looking at renegotiating terms with creditors to extend maturity or loosen covenants.”

Tan said the rise in the Chinese onshore bond market defaults is comparable to the Singapore bond defaults in the sense that the underlying reasons for bond defaults typically emanate from excessive leverage compounded by unfavourable business conditions.

“Both in China, as well as in Singapore, we have seen investors chasing yield and returns that have led them to neglect the fundamentals of the companies they are investing in. It is not a country-specific problem, but more of a global phenomenon. As long as interest rates remain low, corporates will continue to be enticed to increase the amount of leverage in their businesses,” Tan said.

High yield concern

Stratton Street Capital fund manager and partner Andy Seaman said the weak global economic backdrop, rather than the Singapore defaults, will have an impact on high yield bonds in other Southeast Asian countries.

“The regional backdrop is poor for high-yield bonds and other countries in the region will suffer in the same way, particularly if they are in energy-related production,” he told FSA

The situation in Singapore is a concern, he said. “The number of NPLs [non-performing loans] in Singapore is at a six-year high. There is a lot of pressure out there. The global economic backdrop is important. Energy prices tend to be low and this is very bad news for the high yield sector.”

Sean Taylor, CIO for Asia Pacific at Deutsche Asset Management, said he is not concerned about the Singapore bond defaults.

“We believe that the problem is mainly coming from issuers whose businesses were concentrated in the oil and gas sector, and not related to the Singapore domestic economy. If commodity prices remain under pressure, we can expect more bond defaults in this sector in the Asian region,” Taylor told FSA.

The flood of liquidity from monetary easing globally has led to fast growth in Asian bond markets over the last few years, he said.

“It is not surprising to see some defaults, especially in stressed sectors, such as the commodity-related corporate. We believe that Asian bond market is healthy overall, and investors should stay selective.”

Part of the Mark Allen Group.