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Keeping to the theme: Catching up on credit

Andrew Wong, Ezien Hoo, Wong Hong Wei and Chin Meng Tee
Andrew Wong, Ezien Hoo, Wong Hong Wei and Chin Meng Tee • 10 min read
Keeping to the theme: Catching up on credit
Public housing body HDB was among the biggest issuers of Singdollar credit this year / Photo: Samuel Isaac Chua
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The theme in our Singapore credit outlook for 1H2024 was to “buy while rates are still high”. This was based on expectations that the higher-for-longer rates narrative was closer to coming to an end, and that stable to lower rates could improve risk sentiment and benefit risk assets in 2024.

Although rates have been somewhat volatile so far in 2024 (and US Treasury yields are higher than they ended 2023 as of the time of writing) and economic cues remain skewed (China’s official manufacturing Purchasing Managers’ Index or PMI shrank for the fifth consecutive month in February, whereas the non-manufacturing PMI rose to 51.4, aided by a travel boom during the Lunar New Year holidays).

In the US, 4Q2023 GDP growth was revised 0.1 percentage point lower to 3.2% q-o-q seasonally-adjusted annualised on account of lower inventory investment, but resilient consumer services and strong government spending remain intact. Risk assets have performed relatively well of late. 

The US stock market reached record highs in February despite healthy US economic data, prompting market expectations for the timing of the first US Federal Reserve rate cut to be pushed out further, and financial markets in general appear to be taking the prospect of a bumpy disinflation trajectory well in its stride. Performance of the Singapore credit market has been largely within our expectations so far this year; and while this may not be so much for the reasons that we expected (that is, performance has not been driven by rates stabilising to falling, but rather from the lack of supply), our theme for 1H2024 continues to hold.   

But buyer beware 
Asiadollar spreads continued to tighten for the fourth consecutive month in February, with Bloomberg Asia IG spreads reaching its all-time low of 91 bps on Feb 22. While part of the spread tightening is helped by expectations of rate cuts, the real driver of the tighter spreads is the lower supply that has not been forthcoming. Asiadollar primary issuance for February was US$8.78 billion ($11.68 billion), down 22.5% y-oy (and down 46% from February 2022). This is on top of the 2023 issuance decline where Asia ex-Japan dollar issuances in 2023 dropped around 19.8% to some US$118.9 billion, according to Bloomberg. The underlying demand for credit appears resilient and issuer fundamental performance remains solid, given recent earnings announcements. 

However, the continued tightening of spreads means valuations are becoming stretched and increasingly vulnerable to a correction in the context of ongoing global geopolitical tensions and in the event of a sharper-than-expected economic slowdown. 

See also: Singapore sells green bond, adding to global deals record

Recent fund flow data on global bond markets are mixed, although there are still overall net inflows. However, emerging markets continue to see outflows, in particular emerging Asia. Developed markets, on the other hand, continue to see inflows with the largest from North America. The US saw record issuance in February of US investment-grade corporate bonds worth US$190 billion, beating the US$151 billion record for February 2022 and up from the US$170 billion priced in January. This has led to some spread widening in the past week due to market indigestion, although new issues continue to perform relatively well.

Property concerns still occupying mental real estate 
Potential event risks in credit markets remain tied to property in different parts of the world. The early February announcement by New York Community Bancorp (NYCB) of weaker-than-expected earnings raised new questions on the state of the US regional banking sector and its relatively higher exposure to commercial real estate. NYCB and regulators have recently sought to allay any fears with NYCB receiving a US$1 billion equity injection from several investors, while US Federal Reserve Chair Jerome Powell voiced confidence in the overall US banking system in a Senate Banking Committee meeting in early March. However, he highlighted that “there will be bank failures, but not the big banks”, as a result of the issues surrounding commercial real estate. 

The reigniting of negative sentiments towards US commercial real estate (CRE) crept into sentiments of Asia-based issuers that felt the need to provide more disclosure over their respective exposures after Japan-based Aozora Bank also disclosed in early February its potential losses tied to US CRE. This led to a share price decline of 38%, although prices have recovered as of writing. Aozora is a small bank with a total asset size of JPY7.7 trillion ($69.7 billion) as at Dec 31, 2023. 

See also: Stable Asia dollar and Singdollar credit markets despite rates staying higher for longer

According to the Financial Supervisory Service (FSS), South Korean financial firms are facing KRW56.4 trillion ($57.2 billion) of property market exposure, of which KRW34.5 trillion is in North American real estate. Insurers ranked first with KRW31.9 trillion, followed by banks with KRW10.1 trillion and brokerages with KRW8.4 trillion. As of the end of September 2023, KRW2.3 trillion worth of assets were at risk of default, of which KRW0.9 trillion was in office investment. FSS says there is a likelihood of investments deteriorating due to the work-from-home culture and this period of high interest rates. 

That said, the FSS also sees a limited impact on the financial system as overseas investments account for less than 1% of the overall assets of Korean financial firms. We continue to see the US CRE concerns as having a limited impact on the credit health of the SGD credit market, although certain issuers we cover have exposures to US CRE as part of a geographically diversified portfolio.

Finally, China’s property market has yet to show signs of bottoming out, with transaction volumes remaining low despite a strong holiday boom for domestic tourism and travel spending, as well as announcements from the government of supportive measures. 

Data from China Real Estate Information Corp (CRIC) highlighted that home sales in 44 key cities dropped 40% from a year earlier during the week-long Lunar New Year holiday, while other preliminary data from CRIC highlighted that the value of new home sales from the 100 biggest real estate companies fell 20.9% m-o-m and 60% y-o-y in February, following a 34.2% decline in January. 

Key issuers in the news include China South City Holdings, a property company focusing on integrated logistics, trade centres, residential and commercial ancillary facilities, which defaulted for the first time in early to mid-February after missing a mandatory redemption payment on a dollar bond and an interest payment on another dollar bond. 
More recently, the bonds of China Vanke Co have come under pressure on news of an extension request on its private debt. This has prompted Vanke to announce plans to raise an estimated RMB1.2 billion ($228 million) through an infrastructure real estate investment trust, with underlying assets to consist of three warehousing and logistics park projects.

On March 5, in a response to Bloomberg, Vanke shared that it has prepared funds to repay its USD bond (VNKRLE 5.35% ’24s) that is due next week. These issuers are being watched given that both are government-related. They include the Shenzhen SEZ Construction and Development Group Co (Shenzhen-level state-owned enterprise), which is China South City’s single-largest shareholder and also the provider of the keepwell deed on China South City’s offshore bonds; and Shenzhen Metro Group Co, Vanke’s largest shareholder. Developments are expected to provide a litmus test for the government’s support for China’s property sector.

Not all is lost
Despite aforementioned stretched valuations and potential event risks, we at OCBC Credit Research remain eternal optimists (despite being credit research analysts too) and amid the low supply, there are encouraging trends in our view, particularly in the Singapore-dollar (SGD) credit space. 

For more stories about where money flows, click here for Capital Section

Firstly, fundamentals remain sound following the recent round of results announcements. Earnings generation has been resilient and mostly stable to positive, while leverage metrics have remained within expectations. The one drawback has been continuing reductions in interest coverage ratios due to the higher interest rates. 

However, we do not yet see this as impacting our fundamentals. The business risk profiles of issuers in the SGD credit space are intact and access to bank funding remains ample — the loan-to-deposit ratios for several of the financial institutions under our coverage remain below historical standards, indicating a higher capacity to lend. These factors should support debt servicing capacity for SGD credit issuers in addition to growth strategies with various issuers (for example, Olam Group VC2 -

, Sembcorp Industries U96 - , Singapore Post S08 - , Mapletree Logistics Trust M44U - , Australia & New Zealand Banking Group, Barclays, CapitaLand Investment and Keppel Infrastructure Trust A7RU - ) announcing, completing or progressing acquisitions. 

Secondly, the tighter spreads are incentivising some interesting issuers to tap the market. More recently, the Asiadollar space has seen issuers from India, the Philippines and Mongolia. High-yield Indian infrastructure development and construction company IRB Infrastructure Developers, which specialises in roads and highways, raised new USD debt to repay existing rupees-denominated indebtedness, while Philippine bank Metropolitan Bank & Trust Co issued a two-part US$1 billion deal with proceeds to be used to diversify the bank’s funding sources and establish a benchmark for Philippine bank credit in the international capital markets. 

Also in February, Hong Kong priced US$200 million in digital green bonds as part of a multi-currency US$750 million issue that also included a RMB1.5 billion, HK$2 billion ($340 million), and EUR80 million ($116 million) bond. Proceeds from the issue will be used to finance and/or refinance projects that fall under one or more of the “eligible categories’’ under Hong Kong’s Green Bond Framework. 

The SGD primary credit market has been similarly vibrant both in quality and quantity. Primary issuance is up around 50% for the year to date according to Bloomberg, and new supply has been well-absorbed with no meaningful new issue concessions observed. The continued tight credit spreads in the secondary market despite the new supply in January and February, and coming after the December lull, suggest pent-up demand among buyers for SGD credit. 

The largest issuances were by public housing body HDB and bank capital instruments from European banks such as UBS Group, HSBC Holdings and BNP Paribas. Issuers such as French bank BPCE made a return. while the Singapore Exchange S68 -

Group debuted in the SGD credit space with a $300 million three-year senior unsecured bond. Mapletree Pan Asia Commercial Trust N2IU - priced a $200 million, 10-year green senior unsecured bond, while Daewoo Engineering & Construction Co (DAEENG) priced a $150 million five-year senior unsecured bond, guaranteed by the Credit Guarantee & Investment Facility, a trust fund of the Asian Development Bank. Proceeds of this DAEENG bond are for financing the construction costs of two projects with the Singapore Land Transport Authority related to new MRT lines.  

Be ready to strike
As mentioned in our credit outlook for 1H2024, we prefer positioning in the belly and long tenures when opportunities arise (for example, primary issuance) while rates are still high. Following the end of earnings season, we think investors will be enticed by the prospects of finally being able to deploy their capital in the SGD credit market with new issuances expected to pick up this month. 

Andrew Wong, Ezien Hoo, Wong Hong Wei and Chin Meng Tee are credit research analysts with OCBC’s Global Markets Research team

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