Temasek-linked SGD bonds: Which provides the best risk return?

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Difficulty: Moderate

Due to minimum purchase size of S$250k for most SGD-denominated bonds, this article may be most relevant for Priority/Private Bank clients.

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1) When looking at bond issuers, having a strong corporate parent is a PLUS

2) Temasek has shown support for its portfolio companies in the past

3) CapitaLand, Keppel, and Sembcorp among Temasek-linked bonds with better risk-reward

4) IQ’s View: With most banks offering SGD fixed deposit rates at low 1% p.a, my view is that >3% yields on short-dated Temasek-linked company bonds make more sense than parking your cash in fixed deposits.

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Te-mama-sek! and her children

Who’s the strongest corporate parent in Singapore? In recent months, investors have been getting increasingly jittery on the credit worthiness of the bonds they hold. Faced with a question of which bonds are considered safe, short of looking at credit ratings or conducting some fundamental analysis into the bond issuer, another way is to look at the corporate parentage. In Singapore, the strongest corporate parent would undoubtedly be Temasek Holdings. Significant examples of Temasek’s support for its portfolio companies include its offer to buy out Olam in May 2014 after an attack by short seller Muddy Waters, and its recent pledged undertaking for any unsubscribed rights in SIA’s recent fundraising.

Temasek’s Portfolio Companies. History has shown that Temasek has not been averse to flexing their financial muscle to support their portfolio companies, with the latest beneficiary being Singapore Airlines. In such scenarios, it’s hard to picture a situation where bondholders don’t benefit. The below tables have been extracted from the 2019 Temasek Review, which shows a list of Temasek’s more sizable investment holdings. For companies which have a strategic importance to Singapore and where Temasek holds significant stakes, the likelihood of support would be high if and when these companies encounter trouble.

There have been some updates to the above ownership stakes. Most notably the acquisition of Temasek’s stake in Ascendas-Singbridge by Capitaland, which has resulted in an increase of Temasek’s stake in Capitaland from 40% to 51.5%.

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Capitaland bonds offer the highest yield, on a duration-adjusted basis

Which Temasek-linked bonds have better risk-reward? Among Temasek’s portfolio companies of strategic importance (which in my opinion are Capitaland, DBS, Singapore Airlines, Sembcorp Industries, Keppel Corp, Singtel and Mapletree Investments), I have complied their SGD bonds’ yield-to-worst and duration in the below chart, including bonds maturing 2021 onwards but excluding perpetual bonds. Assuming they all benefit from the same implied support from Temasek, the top left of the chart circled in green (highest yields for shortest duration) would provides the best risk-reward.

Temasek-linked bonds yielding >3%. In the below table, you may see the investment terms of the bonds that are yielding more than 3%. Bonds that are within the green circle in the chart above are boxed in red.

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The InvestQuest’s View

The InvestQuest’s View: With most banks offering SGD fixed deposit rates at low 1% p.a, my personal view is that >3% yields on short-dated Temasek-linked company bonds make more sense than parking your cash in fixed deposits.