We are all familiar with the challenging market environment for credit last year that was plagued by decades-high inflation stemming from residual supply chain disruptions and shockwaves in the energy markets arising from the ongoing Russia-Ukraine conflict. This led to central banks raising policy interest rates and expediting quantitative tightening plans that were originally in place to deal with the flush liquidity arising from the pandemic stimulus. Consequently, business activity slowed slightly towards the end of the year, measured by declining quarterly GDP readings and unemployment rates creeping upwards.
Despite this, the Singapore dollar (SGD) credit market remained largely resilient, with issuance volumes totaling around $22 billion. While this is still 12% short from the some $25 billion issued in 2021, it is not a bad outcome, all things considered, and especially when looking at performance in the Asiadollar space. Fundamentally, SGD issuance volumes in 2022 were largely supported by higher credit quality issues, mainly from financial institutions and government-linked issuers (including statutory boards and Singapore’s publicly-funded universities, and excluding the sovereign).
While financial institution fundamentals have remained stable on the back of past actions to improve bank fundamentals, strong market positions, diversified business offerings as well as solidly capitalised balance sheets, higher issuances were likely driven by expectations of funding costs going higher, the building of capital buffers against possible valuation losses on financial instruments, a relative lack of supply of SGD bank capital instruments in the past 1–2 years and the fact that it is relatively cheaper to issue in SGD against other currencies based on recent reset spreads.
Within the government-linked sector, HDB priced the greatest number of issues, including its inaugural green bond issuance before subsequently pricing another two green bonds. On the other hand, issuance momentum slowed down significantly in the Singapore REITs space, particularly in 2H2022 with just one issue priced in October. Emblematic of the larger trend of rising Green, Social, Sustainability and Sustainability-linked (GSSSL) issuances in the SGD space, it is notable that the largest issuance in the S-REITs sector in FY2022 was also a GSSSL bond, like the case for government-linked issuers.
A key trend in the SGD credit market through 2022 was a strong preference for issuances within the shorter-to-belly end of the curve on heightened duration risk and the flat yield curve that continued to bear flatten over the year. In our view, the short-to-belly end of the curve was able to satisfy both issuers and investors, where investors could decrease duration risk with sufficiently wider credit spreads and issuers could lock in rates for longer. Just three issues out of the 51 issues within the SGD credit market in 2H2022 were priced at the longer end of the curve.
Another key trend that was an unprecedented turn of events was that in 2022 alone, we saw a total of six non-financial corporate perpetuals not calling on their first call dates, surpassing the total of five non calls that had occurred since the first noncall of the ARTSP 4.65%-PERP 2½ years ago.
Darkest before the dawn
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As we enter 2023, we expect challenging conditions could persist for fundamentals and issuance. While the worst has been deemed to be over (with y-o-y inflation growth rates tapering due to the higher base effect) and as calls for peak inflation solidify, we remain mindful that corporate credit profiles could face pressure in 2023 from the lagged effects of restrictive monetary policy and weaker growth expectations for the global economy. This could lead to credit spread widening if earnings falter and impact debt financing ability.
At the same time, a reduction in investments from a weaker growth outlook could also delay issuers’ need to come to market and pressure issuance volumes, with issuers opting to wait out towards the end of 2023/ start of 2024 in hopes of a Fed pivot that could lead to marginally lower borrowing costs again.
We also expect a range of possible scenarios that could play out in the year ahead with some variability in outcomes, given that the scenarios result in rates either staying higher for longer or pivoting earlier than expected, two diverging outcomes for investors. These scenarios include greater near-term pain and a possible frontloading of rate hikes earlier within 1Q2023; another round of synchronised tightening later in 2023 should inflation continue to be untamed following a pause by the Fed; and, in a more optimistic scenario, a soft landing where disinflation occurs without a severe recession and the labour market deteriorates gradually.
Despite the range in outcomes however, we expect 2023 issuance volumes in the SGD credit market to remain robust. The amount of SGD bonds maturing or becoming callable in 2023 remains elevated. We also expect government investment programmes that are increasingly angled towards sustainability to support issuance volumes as net-zero plans progress and climate concerns rise.
The Singapore credit market remains a safe haven for investors based on the credit quality of issuers and the resilient performance of issuances in 2022 against the challenging backdrop. We do not expect significant defaults in the Singapore credit market in 2023, although certain issuers are still vulnerable, including those focusing on the construction sector, as well as those within travel, hospitality and retail, where a full recovery from the pandemic has yet to happen.
In addition, the performance of SGD corporate credit and bank capital instruments in the secondary space continue to benefit from the relatively high participation of private banks that are more focused on yield rather than spreads as opposed to the Asiadollar market that is more focused on credit spreads. This is why during periods of rising rates, SGD credit spreads can compress and hence outperform on a relative basis. We may also see a possible backloading of issuances towards the end of 2023 when visibility in rates become more certain.
We expect 2H2023 to pan out to be a period with higher level of issuance versus 2H2022, barring any drastic widening in credit spreads and assuming that issuers that can afford to wait out would be incentivised to do so.
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Focus on staying short
Our theme for 1H2023 is therefore “keeping it short”. Given the technical outlook, the downside appears limited from here on, while from a fundamental perspective, the upside looks limited. As such, whilst the bias is for credit spreads to widen, we expect widening to be slight and for the SGD credit market to remain a happy hunting ground for investors. With a possible tale of two halves in 2023 on rates movements, we continue to focus on staying short on duration, preferring to stay in shorter-dated bullets in the crossover space where credit risk is more manageable.
Given 2022’s market developments and 2023’s macroeconomic outlook, we think investors should continue to focus on bottom-up analysis from both a fundamental and structural perspective. On the back of elevated non-calls of corporate perpetuals and the price and sentiment sensitivity of bank capital instruments to non-calls, and given the upward bias to interest rates in 1H2023, non-call risk is likely to remain at the front of investors’ minds.
Andrew Wong, Ezien Hoo, Wong Hong Wei, Chin Meng Tee and Wong Yu Le are credit analysts at OCBC
