Singapore Infrastructure Bonds: Q&A

Timothy Ang  |   30 Mar 2021  |    133 views

In light of the new infrastructure bonds announced by the Singapore government in the 2021 Budget, here are some Q&A put to us on the topic:

What are some of the gaps or inefficiencies in the infrastructure bond space in Singapore that lenders and issuers have sought to overcome with the government’s help?

Despite the construction slump during COVID-19, infrastructure spending has been on the rise in Singapore, and the Building and Construction Authority (BCA) projects a recovery of construction demand in 2021, ranging between S$23 billion to S$28 billion, an improvement from the estimated S$21.3 billion worth of projects awarded last year. Of these, 65% (between S$15 billion and S$18 billion) is expected to come from public sector projects.

The government sees possible bottlenecks in raising local currency funding due to limited bank lending by Basel III, an aim to preserve local reserves during covid-19, and shortage of access to a wider range of investors particularly during the early project phases where cash flows from the projects are not to be expected. local currency financing is important to avoid currency fluctuation risk as the projects generate local currency revenues. The bottlenecks will be reduced with the AAA rated Singapore government’s backing for infrastructure bonds. it will also help reduce the cost of funding for longer-dated infrastructure bonds. For lenders, the government’s new infrastructure bonds will provide a wider pool of high-quality SGD fixed income investments, and longer dated SGD bonds to match longer-term SGD liabilities particularly for pension funds and insurers.

Where would infrastructure bond issuers likely come from; what kinds of projects will they be for?

Likely issuers will be statutory boards such as Housing & Development Board (HDB), the Land Transport Authority and the Public Utilities Board, as well as government-linked companies that have infrastructure capabilities. Examples of government-linked companies with existing corporate bonds include Ascendas Pte Ltd and Keppel Land Ltd. The anticipated demand is for public housing and infrastructure projects. Some upcoming major public sector projects scheduled to be awarded this year include various contracts under the Jurong Region MRT Line, the Cross Island MRT Line Phase 1 and the Deep Tunnel Sewerage System Phase 2.

Does Singapore currently require any major infrastructure funding needs, e.g. for electric car infrastructure in line with the Singapore Green Plan 2030?

Redevelopment of different parts of Singapore such as Jurong Lake District, Punggol Digital District and Woodlands North Coast etc and rejuvenation of other public infrastructure in mature HDB estates with new schools and hospitals are some major plans. Expansion of the rail network by over 100km over the next 10 years is also on the table. Upgrades to existing infrastructure may also be done, which could be for electric car infrastructure in line with the Singapore Green Plan 2030. We are seeing new agreements to accelerate the adoption of electric vehicles in Singapore, such as the one between SP group and Hyundai Motor Group signed 12 Nov 2020.

Is this a needed move given the increase in development expenditure juxtaposed against an expected budget deficit in the Singapore government?

We see it as a sustainable effort to be prudent on the Singapore reserves. Attracting more external funding sources helps free the government’s budget for other packages supporting businesses and citizens impacted by pandemic. The government guaranteed infrastructure bonds will not only help budget sustainability, but also help reduce the cost of funding for the bond issuers, some we expect are statutory boards receiving funding from the Ministry of Finance budget as well.

Do you think there will be enough appetite among investors to soak up this instrument, on top of the usual Singapore Government Securities; why? Will they be more of retail or institutional investors?

We think there will be demand for the bonds given they are longer-tenor SGD bonds that allow investors to match longer-term SGD liabilities. Also, we expect longer-tenor bonds to pay higher yields than equivalent shorter-tenors, thus providing a pool of higher yielding high-quality SGD bonds to attract investment. We’re likely to see most demand from pension funds such as the CPF and from insurers, which we see make the largest proportion of investments in existing statutory board bonds.

We understand that these bonds will be priced along the same yield curve as the current SGS bonds – what kind of yield does this mean for 10- to 20-year bonds?

Existing SGS bond yields are priced at 10-year – 1.062%, 15-year – 1.373%, and 20-year – 1.457% (as of Fed 2021). Existing HDB bond spreads range from 30bps to 45bps over SGS bond yields. If we assume the lower range, the new 20-year government guaranteed bond could be priced at around the 1.65% area.

What impact is this expected to have on the Singapore bond market?

The overall effect is positive for the Singapore bond market. For one, government-linked infrastructure sector bonds could see their yields compress with the government’s explicit guarantee. These include statutory boards and government-linked infrastructure company bonds, and also bonds of issuers that win contracts for new government infrastructure projects. Also, potential attracting of new interest from foreign investors will help with more efficient pricing and liquidity for our local bond market.

What will this mean for demand: who will be the likely parties subscribing for them? Will there likely be any interest for retail investors?

We will likely see demand mostly from pension funds and insurers. The anticipated longer tenures of SINGA bonds and their low yields may cause retail investors to seek higher returns elsewhere. Retail investors who are non-Accredited Investors may find wholesale bond denominations of S$250k relatively inaccessible as well. There is no indication of the bond structures yet. More retail participation can be encouraged with smaller lot sizes like current SGS bonds with minimum size of S$1k.

Any thoughts on the way they’re structured: Was this expected? Would it have been better to have had a differently structured product? Why, or why not?

We do not yet observe any structure guidance for the SINGA bonds. Assuming they’re structured like current SGS bonds, which are straight bonds that have a fixed maturity date and coupon rate, this is a relatively safe structure as compared to, for example, perpetual bonds that do not have a fixed maturity date. The way the bonds are structured also depends on investor appetite. Structuring the SINGA bonds as straight bonds, which is a safer structure, will more likely fit more institutional investors safety criteria and attract the most investments.

Since the 2018 budget, has the government has indeed been offering guarantees for long-term borrowings by statutory boards and government-owned companies to build critical national infrastructure? How has demand/response been so far?

There has been no explicit guarantee by the Singapore Government for statutory and government-owned companies for infrastructure. However, statutory boards HDB PUB and LTA are funded in the national budget and are approved by the Minister for Finance. For example, HDB deficits are fully financed by government grants and government loans made up 61% of HDB’s interest-bearing debt as of March 2020. We see demand from institutions rather than retail investors due to the low bond yields.

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