Strong demand for covered bonds in Singapore

Strong demand for covered bonds in Singapore

Market observers say the strong demand and low interest rates reflect global investor confidence in local lenders.

SINGAPORE: Banks in the Republic are tapping a new source of funding, using covered bonds that have been keenly sought by international investors. Market observers have said that the strong demand and low interest rates reflect global investor confidence in local lenders.

Covered bonds are bonds backed by residential property mortgages in Singapore.

Singapore private home prices have fallen for more than two straight years, but global investors are confident homeowners in the Republic will be able to service their loans.

UOB, for instance, saw strong demand for its first issue of covered bonds earlier this month, with investors willing to accept a coupon of 0.25 per cent for the €500 million issue. The issue was more than 2.6 times oversubscribed.

UOB said the strong response showed international investors rated Singapore banks highly, and that they were confident about the quality of the housing loan portfolio.

Said UOB’s chief financial officer, Lee Wai Fai: "When we looked at the order book that came in, we were surprised at some of the names we've never seen before in some of the smaller European states that actually like this product. It gives me a wider reach into Europe.

“This funding added the other dimension of us diversifying liquidity sources. We’ll probably use it for normal working capital to fund customer needs. But more importantly, besides the currency, it opens a new market for me and that allows me to do funding from a different source and even in difficult times."

Covered bonds are debt instruments backed by mortgage loans. To help ensure the underlying loans are secure, Singapore has various safeguards in place, such as restrictions on the type of loans that can be included in the asset pool.

UOB is the second local bank to issue covered bonds, as part of its US$8 billion Global Covered Bond Programme, which was announced at the end of 2015. DBS had earlier issued US$1 billion of covered bonds, under its US$10 billion programme established in June 2015.

Analysts said the strong demand suggests global investor confidence in the credit strength of Singapore banks and the relative scarcity of covered bond issuances in Asia. So far, only Australia, New Zealand and South Korea have issued similar debt instruments.

Going forward, market watchers said that demand for covered bonds is expected to remain strong, particularly amid ongoing market volatility, as covered bonds are seen as safe haven products.

Said Mr Bernard Aw, a market analyst at IG: "Singapore banks by themselves have strong credit ratings, triple-A ratings, so they're considered quite safe entities to invest in, so their fixed income, debt issuance would probably be quite well-received.

"For covered bonds, it's even safer because it's secured against collateral - usually mortgages. In that environment, there's greater demand for covered bonds because of this market uncertainty."

OCBC Bank could be the next to issue covered bonds, with reports saying that it is planning an issue of up to US$1 billion. The bank declined to comment on the reports, but said that it is keeping a close watch on the market.

Source: CNA/ms