Energy company problems expose cracks in Singapore bond market

UOL

26/08/2016 24:00

(Repeating story from Thursday to additional subscribers 
without changes to text) 
    By Saeed Azhar and Kit Yin Boey 
    SINGAPORE, Aug 25 (Reuters) - The collapse of an oil 
services company and the deterioration in the finances of some 
other energy firms have exposed structural cracks in the 
Singapore dollar corporate bond market. 
    The S$200 billion ($148 billion) market took off after the 
1998 Asian financial crisis with issues by state-backed 
companies, banks and real estate firms. But demand from 
investors seeking higher returns has in recent years led to 
illiquid, unrated bond sales by more volatile, high-yielding oil 
and gas services' firms, and by 2014 they were making 17 percent 
of local dollar issues. 
    Bondholders got a rude awakening last month when Swiber 
Holdings  SBWR.SI  filed for creditor protection, making it 
Singapore's biggest casualty of the oil slump and raising the 
spectre of further failures.  urn:newsml:reuters.com:*:nL4N1AF5J6  
    The shock is reflected in the absence of any Singapore 
dollar bond sales by high-yield borrowers since early June when 
property company GSH Corp did a S$60 million issue, more than 
half of which was bought by its executive chairman and by its 
CEO. The city-state's market is currently effectively shut to 
new sales by higher-risk borrowers.   
    The problems come at a sensitive time for Singapore's 
financial sector, which is struggling with a slow-growth 
economy, and as its prized wealth management business has been 
tainted by the corruption and money laundering investigations 
into Malaysian state fund 1MDB. The Singapore authorities 
recently took an unprecedented step by ordering the closure of 
the local operations of Swiss bank BSI because of its 
involvement with 1MDB.  
    "The small size of many issues, the lack of research of 
coverage and the demographics of the Singapore dollar investor 
base ... have exacerbated liquidity concerns over the past 
several months," said Todd Schubert, head of fixed income 
research at Bank of Singapore. 
     
    EXCHANGE INVESTIGATION 
    The top 30 issuers in the local currency market account for 
around half of outstanding bonds, and roughly two-third are 
either by real estate companies or financial services firms, 
according to estimates from Bank of Singapore. Many of these 
companies are backed by the Singapore government or partly-owned 
by state-run investment group Temasek, which enjoys a AAA 
rating.   
    But Singapore lacks a liquid and functioning secondary 
market, corporate bond experts say, which means offloading bonds 
is not easy. Even some of the bonds sold by high-grade companies 
are unrated.  
    Private banking clients had been absorbing the bulk of the 
high-yielding paper despite the risks and limited disclosure 
that comes with unrated bonds.    
    The illiquid state of the market also means that there is no 
 motivation for sellside analysts to rate the bonds or otherwise 
give an opinion. 
    Two people who had bought Swiber bonds said they did so on  
the advice of their private bankers, who also provided risk 
assessments. The investors spoke on the condition of anonymity 
due to the sensitivity of the subject. 
    Investors also were extended loans by private banks to 
encourage increased participation in bond issues, banking 
sources said.   
    The failure of Swiber has hurt Singapore's biggest lender 
DBS Group Holdings  DBSM.SI , which had a S$721 million exposure 
to the company. DBS is also the largest bookrunner in the 
Singapore dollar bond market with a 40 percent market share. 
 urn:newsml:reuters.com:*:nL4N1AO0RY  
    The Singapore Exchange  SGXL.SI , where most of these bonds 
are traded, is conducting an investigation into the Swiber 
failure and said it would take action if breaches in disclosures 
are found.   
    Listing Rules require an issuer to immediately disclose any 
information which may have a material effect on the price or 
value of its debt securities or on an investor's decision 
whether to trade in such debt securities," said Michael Tang, 
the exchange's head of listing policy and product admission in 
an email. 
    "Whether a bond should be rated is a decision driven by 
issuers, lead managers and investors," he said. 
    FURTHER TROUBLES AHEAD? 
    The Monetary Authority of Singapore, the city state's 
central bank, said in a statement to Reuters it would like to 
see more rated issued to improve transparency in the Singapore 
dollar bond market and is exploring ways to build liquidity to 
revive the secondary bond market.  
    But it may have to act quickly given the possibility that  
conditions in the market could deteriorate further as other 
issuers get into trouble. 
    Oil exploration firm KrisEnergy Ltd  KRIS.SI  said earlier 
this month it may struggle to meet terms of some of its existing 
debt agreements.  urn:newsml:reuters.com:*:nL3N1AW193   
    Malaysian oil and gas service provider Perisai Petroleum 
Teknologi PPTB.KL on Wednesday said it has started talks with 
holders of its S$125 million bond maturing on Oct. 3. Perisai 
said its interest cover ratio had fallen below the required 
minimum for the quarter ended June 30, adding that it was taking 
steps to meet the covenant. It blamed depressed oil prices for 
the problem. 
    Bonds totaling nearly S$1.2 billion from energy and offshore 
marine issuers will mature over the next two years, according to 
Thomson Reuters data. 
    High-yield issuers wanting to come to market are likely to 
have to disclose a lot more, said Farhana Siddiqui, corporate 
and finance director at Drew & Napier LLC. "In the short-term, 
there might be a preference for rated bonds."  
    ($1 = 1.3517 Singapore dollars) 
 
 (Additional reporting by Kit Yin Boey from IFR and Umesh Desai 
in Hong Kong; Editing by Lisa Jucca and Martin Howell) 
 ((Saeed.Azhar@thomsonreuters.com; +65-64035664 ; Reuters 
Messaging: saeed.azhar.reuters.com@reuters.net)) 
 
Keywords: SINGAPORE BONDS/