Q: Singapore's domestic bond markets have come a long way in the last couple of years.
A: They certainly have. But actually, the market goes back as far as the late 1980's, although then it was very much a start and stop affair. What really drove it forwards was the property boom of the early to mid 1990's. Unlike Hong Kong where bank lenders have always been very aggressive, property companies here were forced into the wider capital markets and it was a great opportunity to lay the foundations of a domestic bond market.
Then obviously the Asian crisis hit and this is when the government stepped in. Compared to Hong Kong and Taiwan, Singapore was still way behind at this point. But there was a complete change of mindset at the Monetary Authority of Singapore (MAS) and it was very quick to recognise the need for efficient domestic capital markets. This was what gave the impetus to Notice 757 issued in the summer of 1998 and allowing foreign issuers for the first time. Since then, the government has streamlined all manner of issues making it easier for both foreign and domestic borrowers to come to Singapore.
Q: Such as?
A: Well it has extended and deepened the government yield curve, opened up the swap market, pushed out its own statutory boards and government-linked companies to create a semi-sovereign yield curve and initiated a whole series of tax breaks. In August last year it also approved 16 ABI's (Approved Bond Intermediaries) with licenses of between one and four years. Borrowers globally have a lot of choice when it comes to issuance, but they have been coming here because pricing is extremely competitive and we have a very strong investor base. You're right we have come a long way and the market is still evolving. This gives ABI's lots of opportunities to find issuance windows in terms of finding the right swap and satisfying the investor base.
Q: Citicorp launched the first ever supranational bond issue in Singapore dollars in October 1998. How important a landmark was that deal?
A: It was what put Singapore on the map. Our S$300m issue for the International Finance Corp (IFC) had a three year tenor and DBS and OCBC were co-leads. But the most important aspect about the deal was the fact that it was bought to market in double quick time and at a very competitive funding rate. The deal came at a yield of 4.7% which from memory, was about 50bp to 55bp over government bonds. It's success highlighted a couple of things about Singapore, one of the most important of which was the strength and sophistication of our investor base. Singapore is quite atypical in terms of funds under management. It's very large and there are a lot of Treasury centres, unit trusts and insurance companies based here.
The other thing was the timing of the deal. The Asian crisis was still in full swing, but here we had a triple-A rated borrower. Not only that but a triple-A rated government and its various departments coming to market on a more active basis as well. The investor response was not surprisingly very enthusiastic.
Q: What kind of cost savings might an offshore issuer enjoy?
A: An issuer could potentially save several basis points. But at the end of the day, deals are always referenced off the euromarkets as well, so if there is say a 20bp differential between one credit and the next, then it is likely to be pretty similar in Singapore.
Yet there is something to be gained for novelty value. When Depfa came to Singapore, for example, no-one knew who they were or what they did. But once they did a roadshow and made a public relations effort, investors' attitude changed and they were willing to cede a basis point or two.
Q. Subordinated debt issues seem to have been quite popular lately.
A. Investors like sub debt issues because the ones done so far have been by well regulated local or international banks. Even though an issue might be rated BBB on a subordinated basis, investors still take comfort from its higher senior rating. Government bonds are not offering great yields, so investors are looking for higher returns elsewhere. Sub debt seems to offer this.
Q. Do you think investors are quite willing to move down the credit curve?
A. Not really. Most funds are looking at A-rated credits and upwards. BBB-rated deals might give you the extra yield and some funds do look at it, but most are constrained by their trustees. Sub debt, is the one notable exception.
To get the extra yield, what we might see more of in the future are more innovative, structured deals such as bull/bear structures.
Q: How do you think the debt markets will now develop further?
A. It would be good if we could see more repeat issuance. Many of the large supranationals have come to the market once and it would be good to see them again. However, rather than develop full yield curves, I think re-openings are the way to go. The market price is already there and as any new deal would rank pari passu to the old, it would increase overall trading volumes.There have been one or two already. Not so long ago, the Housing & Development Board (HDB), added a new $300 million line of ten year paper to an existing $300 million line.
For offshore issuers, it makes particular sense because the swap market is not fully developed yet. Most banks are good for three, five or ten years is the issue size is up to S$100 million. Beyond this, it gets more problematic and we have to take more steps to develop a more efficient market. More banks need to set up separate desks to manage their swap books and this is starting to happen. It is a very competitive market and they know that they will be left behind unless they do.
Q. How do you think the market will develop in terms of longer-dated issues.
A. Since June 1997, the government has worked very hard to develop a liquid bond market for its own issues. So far, it has been able to do in three, five and seven years. Hopefully there will be more ten years too, but generally speaking that part of the curve is also coming along nicely. What we are seeing now is a period of consolidation. The government had done a lot over the past two to three years and wants to make sure that the yield curve it has already created is a true curve, before it thinks about moving out to 12, 15 years and beyond. It's a sensible strategy.
Q. Do you think the internet will have much of a role in the Singaporean bond market?
A. Yes and the government is looking at an electronic bond market. If it decides to move ahead, it should think about putting the primary market on-line first. In the US and Europe there have already been several issues done auction style on the internet and they have been quite successful.
If it works for the government market in Singapore, the next step should be to think about secondary trading. If that works and there is a liquid, transparent market, then we can get more retail involved more. Realistically, though this will be some way down the line.
Q. Concluding thoughts?
A. Well, the last piece of the puzzle will be to get more corporates and banks to issue. The government has laid the groundwork and we have a number of highly-rated offshore borrowers coming in. Now we need to get more local corporates interested and also to encourage greater use of ratings. If they don't do it of their own accord, the agencies will start assigning them anyway and it is better to have a more pro-active process.
The government has done it's bit, now it's up to the private sector to take advantage of it.
Q. Thank you.
