SINGAPORE (June 4): Given the massive selloff of perpetual bonds earlier in March, analysts believe the bonds market has limited downside as risks have been largely priced in. 

“Yields have been compressed as we start to see demand for attractive risk-reward despite non-call risks,” says Phillip Capital credit analyst Timothy Ang. 

The way Ang sees it, the demand for perpetual bonds are also not at risk of weakening. 

“Looking at average yield-to-worst (worst yield scenario) of the SGD perpetual bond market, yields are historically attractive and have room for further yield compression,” he says. 

In particular, the OCBC Credit Research team notes that the Singapore corporate bond space had “plenty of activity” with previously anticipated trends coming to the fore.

Although OCBC analyst Andrew Wong says that primary activity in the SGD space continued to decelerate with just $1 billion worth of deals priced in May, there had been increasing conviction in the secondary market with deals still “drifting up and bid-ask spreads continuing to narrow”, albeit being partially due to the lack of inventory.  

To be sure, analysts recall how early May marked the possibility that Lippo Malls Indonesia Retail Trust (LMRT) may opt to defer its perpetual distributions. This became the latest concern for perpetual holders who were already facing heightened risk of non-call on their perpetuals given the low rate environment. 

Wong recalls how on May 29, Ascott Residence Trust (ART) announced that it was not calling on its ARTSP 4.68%-PERP, setting a precedent for being a non-distressed issuer to miss the call.

“In our view, ART has signaled to the market that it has opted in favour of economics over continued market access to the perpetual market,” says Wong. 

“This development will likely send ripples through the SGD perpetual bond market and perhaps the wider market in general which is continuing to find stable footing,” he adds. 

Phillip Securities' Ang, however, terms this a “prudent step” by ART. “ This sets a precedence in the Singapore perpetual bond market since its inception in 2011, apart from defaults and restructuring,” he says. 

“Given Ascott’s option to call the perpetual every distribution date after June 30, 2020 (every 6 months), the company’s management has indicated their consideration to call the bond when credit markets stabilise possibly within the next 1-2 call dates,” he adds. 

Looking ahead, Ang anticipates that perpetual bonds with upcoming call dates may face the “same fate” as Ascott’s. Ang is advising investors to compare the potential refix coupon rate with the current coupon rate to determine the risks of a “non-call” scenario. 

“A lower refix coupon rate will translate to higher cost savings for the issuer if not called, suggesting a higher non-call risk,” explains Ang. 

He notes that Wing Tai Properties and OCBC are next in line, with perpetual bonds that have respective call dates on Aug 24 and Aug 25 this year. These bonds have coupon rates of 4.35% and 3.8% respectively. 

OCBC’s Wong, however, stresses that economies and companies remain in the “repair and defensive mode” on the back of the ongoing Covid-19 pandemic. 

“The tell-tale signs are still ahead of us with 2Q2020 results to highlight the extent of damage to issuer fundamentals through business and financial impacts,” says Wong. 

Despite “unprecedented central bank support” from countries in the prior months, Wong notes that the environment remains “highly flammable” as they continue to reel from lockdown effects and rising unemployment levels. 

With the outlook for the sector remaining uncertain, Wong is advising investors to look for names with established market positions and solid access to external capital. He is also calling for investors to refrain from looking at options with high yields. 

“As such, we continue to advocate staying in high grade of Neutral (3) issuers and above with selective preference for Neutral (4) names with the worst of the credit crunch likely behind us,” says Wong.