Post-Swiber: Expect more difficulty for companies to raise funds

The past 12 months have been dominated by companies raising funds through bonds or perpetual issues in anticipation of interest rate hike by FED. There were no short of investors.  Many of the issues were over-subscribed, and most of these companies up-sized their bond issue way above the originally amount. Just by a stroke of their pens, they could easily raise another $50m to $100m. Aspial Corp made 2 issues within 7 months, and in the latest issue recently raised to a maximum of $200m against the original public offer of $50m for a 4-year bond at a coupon of 5.3%. Perennial Real Estate originally planned a $200m 4-year bond issue at 4.55% increased the offer size from $200m to $280m. Hyfux, whose original $300m offer of the 6% perpetual bonds also increased to $500m, even bigger than the market-cap of the company. Whether in the full-fledge corporate bond for high net worth individuals (HNWIs) or sliced tranches for retail investors, there were no short of takers. Investors see these investments as passive incomes in comparison to the bank’s paltry interest rate of less than 1%. Until late last year, defaults on bond coupon payments were almost non-existent. Even when PT Trimkosel Oke and Pacific Andes Resources defaulted more than six months ago, they seemed to be widely ignored as these companies were foreign based. Unfortunately, these bonds were sold through the private banking network, which also meant that some of the local High Net-worth Individuals (HNWIs) had also been affected.  Now with the default of Swiber, investors now suddenly realise that many high-yield bonds are prone to default and the expected return might not duly compensate for the risk. Unfortunately, the damage has already been done. Bondholders suddenly find the recently purchased notes and perpetuals now trading below par. Going forward, at least for the time being, it is unlikely that companies are able to raise funds through this avenue any more. Certainly, banks with their private banking network, are likely to scrutinize the bonds more closely before selling them to their clients.

Following the default of Swiber, banks are also likely to become more cautious with their lending programs. With the ever-increasing non-performance loans (NPLs), company financials will be scrutinized closely and asset value will be assessed with higher safety margins before banks lend out to them. It is certainly not going to be easy for companies to borrow from banks without quality collaterals on the table.

With the bank network being almost severed from them after the Swiber saga, companies may have a hard-time raising funds for their operations. They may have to resort to scaling down their operations and to sell off some of the assets, especially the inoperative ones. Unfortunately, inoperative assets are more of a liability than an asset during bad times because no company would want to stifle their own cash flow by buying assets that not revenue-generating. Even supposedly good assets that are able to preserve values over time, such as properties and land, may not fetch good prices when times are bad or when seller companies are in dire straits.

So what are other options can a company explore to raise funds? Perhaps, issue rights or raise notes or perpetual bonds from retail investors. When a company has to resort to issuing rights during such times, it is likely that company is not in a good shape. In all likelihood, the company share price is trading at their lows. Hence raising rights can be a huge challenge. Many companies, even after shares consolidation, were trading even below 20 cents, which is the Minimum Trading Price (MTP) threshold for SGX shares. Certainly, a right issue will set the trading price below the MTP putting a lot of pressure for them to make good on their share price in future.

So, in summary, even though a company may have several avenues to tap funds, the real situation may not be as rosy. We may say that some companies were lucky to be able to raise bonds before the Swiber saga. In fact, some might have felt even luckier to have raised more than their expected needs. However, we will only know if they are really that lucky somewhere in the future. Paying out coupons of 5%, 6%, 7% and even 8% is no small matter compare to paying a smaller interest to the banks. Paying a bigger quantum as coupons for an enlarged debt is even worse. They may be able to solve their operating needs now, but it is really kicking the bucket down the road because they have to pay for a higher price in future. In all likelihood, companies may have exhausted all the channels of getting cheaper funds, and they have to resort to paying a higher interest to attract investors. Investors, instead of zooming and be attracted the expected return, should now turn the table around and ask himself a critical question. Why does the company willing to pay me 6% (or 7% or 8%) per year in coupons when the bank rate is only around 1%. Only when one starts to ask himself such critical questions would he then become less bias in his thoughts.

Take Care!

Brennen has been investing in the stock market for 26 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.