SINGAPORE (July 8): In 1H20, total issuances in the bond market fell to 39 issues and an issuance amount of $8.3 billion, compared to the 56 issues and record issuance amount of $15.4 billion in 1H19.
The significant drop in the number of issues and issuance size were mainly driven by market volatility and a weaker operating environment brought about by the global outbreak of COVID-19, says OCBC’s credit research team, Andrew Wong, Ezien Hoo, Wong Hong Wei, and Seow Zhi Qi in a report dated July 4.
As such, OCBC Bank is expecting bond defaults around the world to rise, following the Covid-19 outbreak, which has impacted even “traditionally recession proof sectors” such as telecommunications, healthcare, and retail REITs.
The team also foresees “significant risks and opportunities abound” as the world moves into the second half of 2020.
The pick-up in May’s issuance volume from April hinted that the worst seemed to be over, though the volume still remained below the levels seen in January and March.
In June, issuance amounts finally picked up, mainly attributable to the Housing and Development Board (HDB)’s large issuance of $800 million.
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“The low issuance volume could be attributed to SGD bond investors hunting for yields as they seek to be compensated for higher risks hence causing a mismatch between what issuers can offer and what investors are willing to accept, and fears of a second resurgence of COVID-19 prompting lockdowns again,” says the team.
Looking ahead, there are several headwinds including the uncertainty of the global pandemic, rising US-China trade tensions, and Hong Kong’s new national security law. However, the lack of supply in the SGD bond market and likely pent-up demand from investors may suggest the possibility of tighter yields.
“However, we think bond investors would err in the side of caution with the macroeconomic environment and all-time low rates weighing in their minds. This means investors would delicately balance the credit profile of the issuers against yields demanded and we do not expect indiscriminate buying in 2H2020,” it adds.
Singapore REITs
REITs, especially the retail and hospitality sector, were not spared from the effects of the pandemic either.
As telecommuting becomes the new normal, this may become a medium- to long-term threat for office REITs, although the team expects stable credit profiles to see the sector through on lowered demand.
Retail REITs may suffer from higher vacancy rates and lower rates should prolonged operations restrictions continue, on top of an accelerated structural shift towards ecommerce.
Industrial REITs were comparatively more resilient. The team says it expects industrial REITs’ credit profiles to diverge depending on their exposure to SME tenants.
Following global lockdowns, hospitality REITs took the hardest hit, despite buffers from their sponsors. Credit profiles for hospitality REITs are expected to be weaker, and downgrades likely, on the extended closure of international borders.
