SINGAPORE (Nov 28): Singapore’s wealthiest residents may be regretting bank rolling the island’s oil industry.
Bonds from oilfield services providers are the worst performers among all local notes this year as the fuel slumped more than 30% since June. Two-year securities of Swiber Holdings ( Financial Dashboard), which helps build offshore platforms, are trading about 7 cents below the average price for Singapore debt sold since Dec 31. Most of the debentures were taken by private banks on behalf of their affluent clients.
Singapore’s rich have become the driving force in the island’s bond market, snapping up 86% of the 20 highest-yielding local notes issued this year as the central bank warned about rising sales to individuals.
Swiber and Ezra Holdings ( Financial Dashboard) are scheduled to repay $720 million of notes within the next two years, or three-quarters of the borrowers’ market value, after funding expansion that helped make oil products Singapore’s biggest export industry.
“Most of the buyers of high yield small deals in Singapore dollars have been high net worth individuals,” Vishal Goenka, the Singapore-based head of local currency credit trading for Asia at Deutsche Bank AG, said in an interview. “As they try to sell, the liquidity or support offered in the secondary market is limited.”
Artificial Island
While Singapore doesn’t have natural oil and gas reserves, it’s one of the world’s three biggest oil refining centers and has become Asia’s largest trading hub for the fuel. The sector contributes about 5% to gross domestic product and is centered on the artificial Jurong Island.
West Texas Intermediate crude fell to the lowest in more than four years this week amid the highest US oil production in more than three decades. Oilfield services providers are the most vulnerable to lower commodity prices, according to Lawrence Lu, a credit analyst at Standard & Poor’s in Hong Kong.
“We are monitoring the smaller companies, especially those that aren’t associated with big exploration and production groups,” said Lu, adding that investors should compare the borrowers’ cashflow to total debt.
Swiber, with a market value of about US$150 million ($195 million), has raised the equivalent of US$289 million in four bond sales this year, three in Singapore dollars and one in offshore yuan. The October 2016 notes issued at par in April traded at 92.95 cents Nov. 26, while the June 2016 bonds sold in May were at 94.66.
Market Concerns
Swiber had negative operating cash flow of US$5.3 million in the quarter through September, according to its latest results, and total bonds and loans climbed to US$1.23 billion at Sept. 30 from US$837.7 million at the end of 2013.
“The company is aware of current market concerns surrounding the oilfield services sector as a result of the recent weakness in oil prices,” a Swiber spokesman said in an e-mailed statement. “Swiber has developed good longstanding and supportive relationships with its banks, and is confident of its ability to meet existing debt obligations when these come due.”
Singapore had the third-highest proportion of millionaires last year, behind Qatar and Switzerland, according to a Boston Consulting Group Inc. survey. The island’s wealthy are pursuing more lucrative returns as the three-month benchmark rate stayed below 0.38% for the past two years, while fixed deposit accounts for that period yielded an average 0.14%, according to the Monetary Authority of Singapore.
Stretched Credit
Risk appetite is rising. The proportion of Singapore dollar-denominated bonds with at least 5% coupons climbed to 39% of issues this year from 28% in 2013, according to data compiled by Bloomberg.
“In this low-rate environment there have been numerous examples of bonds coming to market with stretched credit metrics,” Deutsche Bank’s Goenka said.
Ezra Holdings’ total liabilities were US$2.2 billion at the end of August, a 22% leap from a year earlier. Its 2016 bonds issued in March have dropped more than two cents in as many months, Bloomberg compiled prices show.
Oil’s correction should be temporary as a lack of substitutes will ensure strong demand, said Eugene Cheng Chee Mun, chief financial officer of Ezra Holdings.
“We are proactively looking at refinancing options,” said Cheng Chee Mun. The company is at the peak of the capital expenditure cycle and should start increasing free cash flow next year and hence start to deleverage, he said.
Shares Plunge
Oil and gas services comprise 5.6% of the Straits Times Index, the fifth highest weighting in the local stock market gauge, according to data compiled by Bloomberg. Sembcorp Marine Ltd. ( Financial Dashboard), the world’s second-biggest oil-rig maker, is down 25% this year, the index’s worst-performing stock.
Keppel Corp. ( Financial Dashboard), which earned 69% of its revenues from the offshore and marine sectors in the quarter through September, is down 18%, the third-worst performer.
The Organization of Petroleum Exporting Countries met in Vienna yesterday amid calls from some members to cut production and support oil prices. The median forecast of analysts surveyed by Bloomberg has WTI futures at 84.90 by the end of 2014, down from 95.10 predicted at the start of the year.
“Many of these companies may have become complacent because after three years of a steady oil price above US$100 it becomes easier to justify a lot of investments,” Clement Chen, an equities analyst with Barclays Plc in Hong Kong, said by phone on Nov. 25. “Now, with oil prices down and a supply and demand imbalance,” the industry could come under pressure.