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Institutional demand seen for SINGA bonds that follow SGS structure

Institutional demand seen for SINGA bonds that follow SGS structure

Source: Business Times
Article Date: 19 Feb 2021
Author: Lee Meixian

Analysts expect this as the new Significant Infrastructure Government Loan Act bonds will mirror their Singapore Government Securities peers in yield, tenor and structure.

The new Significant Infrastructure Government Loan Act (SINGA) bonds will qualify as liquid assets that financial institutions (FIs) can hold to meet regulatory requirements, The Business Times has learnt.

This is akin to how banks already do so with government bonds. Given that these SINGA bonds will mirror their Singapore Government Securities or SGS (Market Development) peers in yield, tenor and structure, they too are expected to attract institutional demand from banks and insurers, rather than retail investors who would favour shorter tenors and higher yields.

Banks hold SGS for many purposes, including market making and trading. But while data on the total amount of SGS they hold is not published, BT understands that a large proportion of SGS is held by banks for regulatory purposes, because they are considered to be high quality and liquid instruments.

The new SGS (Infrastructure) issued out of SINGA will rank pari passu with the existing SGS, and will be recognised similarly from a regulatory perspective. They will be priced along the same yield curve, backed by the government's assets, and will carry the same credit risk.

As such, the central bank expects the market to treat both types of SGS no differently.

To be sure, these SINGA bonds differ from traditional infrastructure bonds in that instead of being backed by infrastructure projects, they are in fact plain vanilla bonds backed by the government's balance sheet. Proceeds will go towards financing major infrastructure considered crucial to Singapore's long-term sustainability.

Wong Hong Wei, credit analyst at OCBC Bank, said that the competition for institutional demand that SINGA bonds pose to other government-guaranteed bonds is already evident from the swap curve and sell-down of some statutory board bonds (such as HDB's 10-year bonds) on Thursday.

"Conversely, the announcement has not impacted demand for corporate bonds, which has seen more retail demand than bonds issued by statutory boards," he added.

"That said, SINGA bonds which are green may attract interest. We note that a number of green and sustainability-linked bonds in the market have attracted very strong interest, including Surbana Jurong's SRBJNG 2.480 per cent Feb 10, 2031 and Ascendas Reit's AReit 3 per cent Perp."

Timothy Ang, a bond analyst at Phillip Securities Research, said that the anticipated longer tenors of SINGA bonds and their low yields may cause retail investors to seek higher returns elsewhere, even if lot sizes are kept small like the current SGS bonds at a minimum investment of S$1,000.

He added that "straight" vanilla bonds with a fixed maturity date and coupon rate would be a relatively safe structure as compared to other papers such as perpetual bonds that do not have a fixed maturity date, for instance. "Structuring the SINGA bonds as straight bonds . . . will likely fit more institutional investors' safety criteria and attract the most investment," he said.

Clifford Lee, DBS Bank's global head of fixed income, noted that there is plenty of excitement following the announcement of the SINGA bonds as the market awaits formal announcement of how they will be issued, structured and offered.

Asked if he would have preferred for them to be of a slightly lower investment grade so that retail investors can also participate, he replied that the reality is that SINGA bonds structured similarly to existing SGS bonds will give the government the lowest and most efficient cost of financing for its infrastructure projects. "Because it would be as predictable and liquid as SGS," he said, although he conceded that this would mean that more of the same kind of investors already invested in SGS bonds will likewise pile into these SINGA bonds.

So far, retail investors have shown more appetite for the government-issued Singapore Savings Bonds (SSB). As at Oct 1, 2020, about 120,000 individuals held more than S$5.6 billion of SSB. Their interest rates are based on the average SGS yields the month before, and have been on a downtrend. As for SGS, over the years, demand for them has grown in tandem with Singapore's financial sector, as banks and other FIs need to shore up more regulatory assets.

Source: Business Times © Singapore Press Holdings Ltd. Permission required for reproduction.

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