Idea of the Week: Retail investors, here are three retail bonds for you to consider!

2023 had been a great year for the Singapore T-bills, and it is no surprise. T-bills have been one of the best options for retail investors to gain exposure to short-duration bonds at a relatively lower initial investment, relative to corporate bonds. However, we think it is time to bring back the focus back to retail bonds which provides investors equally attractive opportunity, with even lesser initial investment.

For a quick introduction, retail bonds are made available to all investors, including mass retail investors, in smaller denominations of SGD 1,000 per lot. The intention is to make bonds accessible to the mass retail investors, as compared to the higher requirements of SGD 250,000 per lot on the wholesale corporate bonds. Retail bonds might also see more liquidity given the secondary trading available on both over the counter ("OTC") and exchange (both sources of bonds for trading are available through our platforms), while the wholesale corporate bonds are limited to OTC trades.

In this article, we highlight three bonds (Table 1) for retail investors looking for higher yields than T-bills without material increase in credit risk. The following issuers not only possess strong credit profiles but also offers attractive yield pick-ups relative to T-bills. Before jumping to our recommendations, let us take a quick look at the various issuers.

Table 1
SGD Retail Bonds

Issue	Ask Price	Yield to Call/Maturity	Years to Call/Maturity
ASTLC 3.000% 18Mar2031 Corp (SGD) - Class A-1 - Retail	97.56	4.19%/ 4.01%	2.16/ 7.16
SIASP 3.030% 28Mar2024 Corp (SGD) - Retail	99.84	- / 3.90%	- / 0.19
FPLSP 4.490% 16Sep2027 Corp (SGD) - Retail	100.83	- / 4.24%	- / 3.66
Sources: Bondsupermart, iFAST Compilations. Data as of 18 January 2024

Frasers Property Limited

Frasers Property Limited (“Frasers”) is a multi-national developer-owner-operator of real estate products and services across the property value chain. Headquartered in Singapore, it sees total assets of estimated SGD 39.8b as of 30 September 2023.

For the full year ended 30 September 2032 (“FY23”), Frasers saw improvements in its top-line with revenue increasing by 1.8% - from SGD 3,877m (FY22) to SGD 3,947m (FY23). However, the profits for the year fell by 83.4%, from SGD 1,771m (FY22) to SGD 295m (FY23). The significant drop in FY23 was due to the net negative fair value changes for properties and higher net interest expense. The unrealized net fair value losses were contributed by commercial properties in the UK and industrial logistics properties in Australia and the EU, primarily a result of higher capitalization rates.

Looking beyond the fair value changes, Frasers has sought to strengthen its earning sources over the years, particularly through developing its recurring income. Frasers’ recurring income saw gradual yet steady improvements since FY20, now becoming one of Frasers’ key income sources. In comparison to other business operations, the recurring income provides highly-needed income stability for the property developer. The net cashflow from operating activities increased from SGD 1,184m in FY22 to SGD 1,556m in FY23, reflecting its strong cashflow generating capabilities despite the fair value changes.

We see modest deterioration in Frasers’ credit profile given the higher interest expenses, but believe it will remain largely stable from here. Cash and cash equivalents fell from SGD 3,320m (FY22) to SGD 2,658m (FY23), mainly due to increased investments in joint ventures and associates, alongside lesser proceeds from the disposal of properties. Frasers’ borrowings increased slightly from SGD 15,889m (FY22) to SGD 16,461m (FY23), of which 72.4% of the debt is fixed as of 30 September 2023. The average cost of debt increased from 2.7% (FY22) to 3.5% (FY23), with the interest coverage ratio falling from 4x to 3x across the same period. Impact arising from increased interest rates should mostly be accounted for, especially given the relatively large proportion of fixed-rate debt.

Being a property player, Frasers’ performance sees a large impact coming from interest rates – affecting both property valuations and its credit profile. As interest rates are likely at terminal rates and with little risk of rate hikes, financial stress from interest expense is unlikely to rise significantly moving forward. In addition, Frasers benefits from its diversified portfolio, which is well-diversified across asset classes and regions. While profit margins might differ across the asset class and regions, for an established property player like Frasers, the diversification instead provides for a large degree of stability that it would require. 

Singapore Airlines Limited

Singapore Airlines Limited (“SIA”) is the national carrier of Singapore, which operates the full-service carrier Singapore Airlines, the low-cost carrier Scoot and the aviation engineering services provider SIA Engineering Company. SIA is listed on the mainboard of SGX, with Temasek Holdings being the majority shareholder of the company.

For the half-year ended 30 September 2023 (“1H23”), SIA observed yet another record half-year profit. SIA’s total revenue increased 8.9% from SGD 8,417m (1H22) to SGD 9,162m (1H23), while net profits improved by 55.5% from SGD 927m (1H22) to SGD 1,441m (1H23). Strong performance was largely contributed by 38.0% YoY growth in passenger traffic, with the Group carrying 52.3% more passengers in 1H23 than the prior year.

Demand for air travel remained robust in 1H23, boosted by the full reopening of China and Hong Kong and leading to a rebound in passenger traffic in North Asia. This was reflected by the Group’s 5.8 percentage point increase in passenger load factor (to 88.8%), recording the highest-ever half-year load factor.

SIA’s debt stands at SGD 14,663m as of 30 September 2023 after repaying its borrowings, a slight drop from SGD 15,339m as of 31 March 2023. Despite paying off a portion of the mandatory convertible bonds (“MCBs”) in December 2023, SIA still sees a relatively substantial cash position at pro forma of SGD 11,779m. While the pro forma debt-to-equity ratio stands at ~0.94x (post-redemption of the MCBs), the pro forma net debt-to-equity ratio is estimated at only ~0.18x. SIA’s considerable cash position significantly minimizes the liquidity risks it faces, if any at all.

SIA expects the demand for air travel to remain healthy leading up to 2H23, although recovery in operation across the industry may introduce price pressures and subsequent margins. On the other hand, demand for air freight is likely to remain soft, with excess flight capacity expected to be redirected to air travel. The overall outlook for SIA continues to look positive, with earnings likely to remain high – albeit being quite unlikely to see further record-breaking profits. A key area to watch would be fuel prices, given the current downside risks associated with the heightened tensions across the Middle East. However, we believe the impact will be mostly controlled, given the hedging implemented by SIA on fuel costs.

Astrea VI Series by Azalea

The Astrea VI series of private equity bonds are issued by Azalea Asset Management (“Azalea”). Azalea is indirectly owned by Temasek Holdings and it focuses on the development and creation of investment products to provide investors a wider access to private equity.

For Astrea VI, Azalea reported the half-yearly results for the period from 19 March 2023 to 18 September 2023 (“1H23”). In the recent distribution report to bondholders, the Astrea VI portfolio saw the Net Asset Value (“NAV”) ending at USD 1,075m – falling from USD 1,134m as of 6 March 2023. The drop in NAV arises from unrealized mark-to-market losses. On the other hand, inclusive of the cumulative net distribution, the total portfolio NAV instead saw an increase of +2.6% from the previous reporting period.

As with previous distributions, a large majority of the distributions were committed towards the Reserves Account, which is primarily reserved for the redemption of the Class A-1 and Class A-2 bonds on their respective call dates. Of the USD 112m distributions for the fifth semi-annual period, USD 75.5m have been paid towards the Reserves Account. As of 4 March 2023, the accumulated Reserves Account amounts to USD 306.5m, which covers more than half of the outstanding principal amount (SGD 382m of Class A-1 and USD 228m of Class A-2 bonds).

The loan-to-value (“LTV”) ratio for the Astrea VI portfolio stands at 31.4%, which remains well below the maximum LTV ratio of 50%. We think the portfolio has sufficient buffer should there be further unrealized mark-to-market losses. Astrea VI also has USD 176m worth of available undrawn credit facility which provides additional buffer for further funding needs such as expenses or capital calls in the event of a shortfall.

Recommendations

The SIASP 3.030% 28Mar2024 Corp (SGD) paper is a great short-duration option for retail investors. Overall, SIA boast a healthy credit profile with ample liquidity and manageable leverage levels. With the fierce recovery in travel demand, we expect earnings outlook to remain rosy in the near term. Within the short-duration bond space, SIASP 3.03% paper presents as a good alternative against the Singapore T-bills – especially with SIA’s more than enough cash to cover for all its short-term borrowings.

We see the FPLSP 4.490% 16Sep2027 Corp (SGD) paper as a good option in the short-to-medium duration space. Despite some volatility within the property space, we find Frasers to be a stable issuer capable of absorbing the impact of higher interest rates. On top of that, the FPLSP 4.49% offers good yield pick-up against the likes of SGD fixed deposits in Singapore, particularly since rates offered by most banks have stagnated since the start of 2023.

We like the Astrea 6 Series – ASTLC 3.000% 18Mar2031 Corp (SGD) - Class A-1, given the unique structure of the bond (the issuance is regarded as an asset-backed security instead of a plain vanilla bond). At the same time, ASTLC 3.00% is the only issuance among the three to have a credit rating, rated A+ (sf)/ A+sf by S&P/ Fitch respectively. Although the features attached to the bond might seem complex, we believe the embedded options are what make the bond attractive to retail investors.

Firstly, the ASTLC 3.00% bond has a mandatory call date of 18 March 2026 upon fulfilling the following conditions – (1) there is sufficient cash set aside to redeem all Class A-1 bonds and (2) there are no outstanding credit facility loans. Even if the paper is not called back on the mandatory call date, bondholders are compensated with a 1% step-up on the coupon rate to 4.00%. We think Astrea VI is on track to exercise the mandatory call option as the value in the  accumulated Reserve Account is more than half the amount of outstanding bonds.

Secondly, bondholders of ASTLC 3.00% will receive a Bonus Redemption Premium Amount worth 0.5% of the principal amount if the Sponsor (Astrea Capital VI) receives 50% of the issuer’s equity by 18 March 2026. It was previously announced that the stated condition has been met as of 18 September 2022. This has triggered the Sponsor Sharing, allowing additional payment to be made to the Reserves Account and accelerating the accumulation process.

Historically, for the previous Astrea bond series, credit ratings on the Class A-1 bonds are typically upgraded with the accumulation of reserves. We expect the same for the ASTLC 3.00% bond given the progressive accumulation. As such, the ASTLC 3.00% will also be suitable for retail investors looking for the assurance of a good credit rating.

For investors looking to learn more about the Astrea series of PE bonds and also about their performance thus far, the upcoming annual Astrea Investor Day 2024 on 6 February will touch base on these topics. Interested participants may register through the link here – https://bit.ly/47I2Mj8

Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) holds a position in ASTLC 3.250% 18Mar2031 Corp (USD) - Class A-2 and FPLSP 4.980% Perpetual Corp (SGD), and the analyst who produced this report holds a NIL position in the abovementioned securities.