S&P: Hyflux bond default may signal trouble ahead for Singapore bond market

A Singapore 10-dollar note Photo by Leslie Shaffer

Water infrastructure player Hyflux’s default could be the harbinger of more financial distress cases for the Singapore bond market over the next 12-18 months as lending conditions turn more difficult, S&P Global Ratings said on Monday.

“We believe more defaults could occur in Singapore as earnings may be slowing down and investors becoming more selective,” Bertrand Jabouley, a credit analyst at S&P, said in a note on Monday.

“Due to very low rates and yields in the past five years, Singapore investors, both institutional and retail, have sometimes opted for riskier bonds to increase cash returns,” he said. “Lending appetite driven by abundant liquidity has allowed less-established, often smaller companies to tap the market. Such players are typically more vulnerable to economic up and downs.”

S&P estimated nearly S$4 billion, or around US$3 billion, of Singapore-dollar corporate bonds will mature by the end of this year, with the amount rising to US$10 billion in 2020.

“A more cautious investor sentiment may exacerbate refinancing risk, in our view,” S&P said.

The ratings agency pointed to four key takeaways from the Hyflux default:

  1. While Singapore’s distressed situations over the past few years have been in the energy and commodity sectors, no sector will be immune to financial difficulties, it said.
    “Even companies in defensive sectors, widely understood as having sound resilience and growth potential, are vulnerable to financial distress and default risk if they rely heavily on debt for their expansion and do not appropriately manage their liquidity,” S&P said.
  2. A company’s position can evolve quickly if a company has narrow or uncertain earnings quality, S&P said.
    “This means lenders should do their due diligence before, and surveil their money after, investing,” S&P added.
    It pointed to Hyflux, which issued perpetual securities in 2016, even though its capital structure already should have appeared unsustainable, with a ratio of net debt to EBITDA (earnings before interest, tax, depreciation and amortization) was above 10 times in 2015 and it had an EBITDA loss in 2014.
  3. “Losses can be harsh,” S&P said, noting complex debt instruments have been introduced. Out of around S$60 billion in corporate bonds outstanding, around S$8 billion are perpetual bonds, it estimated.
    For Hyflux, senior creditors recovery will be limited, while subordinated lenders may not recoup any of their investment, showing the higher credit risk, the ratings agency said.
  4. Investors shouldn’t make assumptions about whether governments will bail out private companies, no matter their relative importance, S&P said.
    It noted that at the beginning of April, Singapore’s government told Parliament that taxpayers’ money wouldn’t be used to help Hyflux.
    “This means that while water security is an important theme in Singapore, making Hyflux’s role important to the country, it may
    not suffice to engender government support,” S&P said.


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