Paiton's successful debut shows one way to finance Asia's massive infrastructural needs, as bank lending becomes costlier
DBS Bank's Clifford Lee says Asian investors are active in USD-denominated issues, making up nearly half the investors in the Paiton issue.
Singapore
THE Asean bond market is developing nicely, buoyed by the increasing sophistication of Asian investors and growing demand from global investors.
Early this month, global investors gave a strong reception to a project finance bond sold by an independent power producer in Indonesia; and since April, two Singapore corporates have issued the nation's first green bonds.
Indonesia's second largest independent power producer, PT Paiton Energy, took in US$9 billion in orders for its US$2 billion two-tranche issue.
The bonds comprised US$1.2 billion 13-year notes and US$800 million 20-year notes.
The deal was notable for being the first investment-grade bond, and the largest rated amortising international bond for an infrastructure project in Asia since 2000.
The amortising feature means that some of the principal is paid along with the coupon, unlike for a conventional bond, where the principal is repaid only at maturity.
Ray Tay, Moody's vice-president and senior credit officer, said the amortising feature is seen more in developed markets such as the US; the long term tenor project bond has thus far been absent in Asia.
"It's a deeply positive development, not just for the financial markets, but key for this region and the asset class," he said, describing the Paiton deal as a "beachhead".
HSBC and Barclays were the joint global coordinators for the transaction.
A HSBC spokesman said: "The depth of demand for the deal was exceptional, given that this is the first public project bond transaction to be sold in the markets since before 2000, and proves investors will buy long-dated amortising structures, which is a significant step forward for the Asian capital markets."
Paiton's successful debut augurs well for the region's massive infrastructural projects, which will require diversified sources of funding.
The Asian Development Bank has estimated that Asia will need to invest about US$1.7 trillion a year in infrastructure between 2016 and 2030, representing 5.9 per cent of the region's projected gross domestic product.
Terry Fanous, Moody's managing director for project and infrastructure finance in the Asia-Pacific, said: "This debt issuance marks the return of Asian project bonds raised in the offshore debt capital markets after many years of absence.
"So far, project finance in Asia has been predominantly provided by banks, which will continue to play a key role in this sector over the foreseeable future, but a broader approach will help raise private sector-debt capacity."
Clifford Lee, DBS Bank's head of fixed income, agreed, saying that there will be more such long-term project bonds as bank lending - still the dominant funding source in Asia - becomes more costly.
"There will be a convergence of loans to bonds as banks face capital cost pressures."
Asian investors are more active in USD-denominated issues, he added, but noted that they accounted for almost half the investors in the Paiton issue.
"Asian investors are stepping up and getting more sophisticated," he said.
Vedanta, an Indian commodity company, allocated to Asian investors 30 per cent of its latest US$1 billion seven-year deal, up from the 22 per cent in a January sale - also for a US$1 billion deal - which had a shorter five-year tenor.
Vedanta has been marketing mainly in the US and Europe, but DBS convinced it to do more in Asia, said Mr Lee.
In the year to date, Asia, excluding Japan G3 issuances, has hit US$202 billion, which nearly equals the US$205 billion done for the whole of last year. (G3 refers to bonds issued in USD, euro and yen.)
The green bonds issued by Singapore corporates are a rarity in Asean; China and India have led green bond activity in Asia.
In April, CDL Properties kick¬started the development of a green bond market in Singapore, raising S$100 million from the first domestic deal.
Last month, DBS became the first Singapore corporate to tap the international markets for its US$500 million five-year green bond.
Mr Lee said that this bond, which attracted US$2 billion in orders, was in USD because the bank wanted to appeal to green-fund investors, who are more internationally based.
"It gave us the broadest reach in terms of investors, and we wanted also to draw in new green investors," he said.
Green bonds are not going to be an easy sell, he said. The question potential issuers have asked is: "Is it going to be cheaper?"
A green bond will neither be more expensive nor more onerous in terms of compliance - not when the issue is some US$500 million, but the point of issuing it is to protect the environment and to be socially responsible, he said.
"The environment affects all of us," he said; he added that such bonds are not a one-off occurrence, and that more are likely to follow.

BANKS in Singapore have started a mortgage war, spurred by the lower interest rate for a longer duration, to the delight of the legions of home buyers who are pouring back to a buoyant residential market.

Last week, both United Overseas Bank (UOB) and HSBC launched three-year fixed-rate home-loan packages which until now had been mainly the preserve of DBS Bank, the nation's largest housing-loan provider. Bank of China (BOC) also has a three-year fixed-rate package but with varying yearly interest rates.

UOB and HSBC have joined DBS in selling three-year fixed-rate packages of 1.68 per cent for each of the three years, capitalising on the recent drop in interest rates amid doubts of further rate hikes by the US Federal Reserve.

The key three-month Sibor (Singapore interbank offered rate), which is used to price home loans, has fallen and been range-bound at 1.12283 per cent from a year high of 1.13717 per cent reached in July.
SEE ALSO: Investors should hedge risks, be market-selective in Q4: DBS

The total number of private homes sold in both the primary and secondary markets reached 6,905 in the second quarter of this year. This was the highest quarterly sales figure since the second quarter of 2013, when 6,945 units were transacted before the total debt servicing ratio framework was introduced in late-June that year.

The 6,905 private homes sold in Q2 2017 reflected increases of 32.7 per cent quarter on quarter and 51.8 per cent year on year.

In the first half of 2017, the transaction volume in both the primary and secondary markets was 12,107 units, up 63.7 per cent from the first half of 2016.

"When it comes to fixed rates, most lenders will have a two-year fixed-rate package to offer, but in recent years, only less than a handful would dangle a low fixed-rate term of three years due to the higher costs involved in hedging interest rates for a longer period with an improving global outlook," said Darren Goh, executive director of mortgage broker MortgageWise.sg.

As a result, only DBS and BOC are in the market offering a three-year fixed-rate package, he said.

HSBC came back into the mortgage business in Singapore with a roar last month with an aggressive two-year fixed-rate home loan at 1.52 per cent per annum, and further introduced a three-year fixed-rate this month at 1.68 per cent per annum, noted Mr Goh.

Said Matthias Dekan, HSBC Bank (Singapore) head of customer value management: "HSBC has introduced fixed-rate mortgage packages on the back of home buyers' demand and their expectations of further interest-rate hikes. Given this environment, customers prefer fixed-rate mortgage packages as they allow home owners to lock in the interest rate for the first two to three years of their loan tenure."

Mr Goh of MortgageWise, said: "For homeowners, with more lenders joining the fray to offer competitive fixed rates, it keeps the incumbents in check which leads to more choices and lower interest for everyone."

As for DBS: "We review our home loans on a regular basis to ensure that our rates are aligned with market conditions," said a spokesman on whether it would change its rates now that rivals have gatecrashed its party.

In May, DBS chief executive Piyush Gupta had said no one else in the home-loan market was able to match DBS's three-year fixed-rate package at 1.68 per cent.

The largest bank in South-east Asia, DBS has a arsenal of cheaper deposits than its competitors, which would come in handy in a home-mortgage market-share fight.

A UOB spokesman said: "Our range of home-loan packages is designed to suit the needs of our customers. For example, fixed-rate packages offer customers certainty and assurance that their monthly repayment amount will not be affected by market movements."

OCBC Bank, the second-largest bank in Singapore, remains conspicuous by its absence in the three-year fixed-rate space. It has a two-year fixed-rate package at 2.38 per cent.

Mr Goh noted that banks have recently raised rates for their floating-rate packages, narrowing the gap with fixed-rate loans to within 20 basis points.

"However, there may still be those who would go for floating; for example those thinking of selling their property soon, or those with loans above S$2 million and who believe rates will not rise so quickly or at all," he said.

At S$2 million, on a straight-line basis, each 10-basis-point saving on a floating rate, over the higher fixed rate, translates into S$2,000 savings in a year.

"Generally, fixed rate is the way forward, until such time this latest fixed-rate war ends, which is when we expect US Fed to announce in its meeting this month to start trimming down its massive US$4.5 trillion bonds," Mr Goh said. "We think that is when the market will start to see some real upward pressure on the dollar and 10-year yields, with interest rates going north within three to six months of such bond sale actions.

"Homeowners should make use of this window of opportunity now to lock down fixed rates especially for the longer fixed term."