Singapore's real estate sector forms a big part of outstanding domestic bond issuance, hence scrutiny of the sector is intensifying after the fallout of Swiber Holdings, a marine engineering company.
In a report published on Wednesday, S&P Global Ratings said that the overall real estate sector remains resilient but small developers may face liquidity squeeze, making them more vulnerable to repayment risks on outstanding bonds.
The bigger developers are the largest issuers of bonds maturing in the sector in the next 24 months, thus repayment risks may not be as high. Meanwhile Reits, with their stable recurring cash flows, lower leverage, and large proportion of unencumbered assets, are more flexible financially than developers.
Of the total S$60 billion of outstanding bonds issued by Singapore listed entities as of Aug 31, real estate developers and Reits make up about 52 per cent, with the transport and logistics industry being a far second at around 12 per cent share.
"In our view, smaller developers are more vulnerable than their larger peers to near-term market volatility due to their currently weak liquidity positions," S&P analysts Kah Ling Chan and Annabelle Teo said in the report.
About S$2 billion of bonds will mature in the fourth quarter this year and another S$9 billion next year; Singaporean developers and Reits account for almost 75 per cent of bonds maturing in the fourth quarter and more than 40 per cent of bonds maturing in 2017.
But the developers' debt maturities are more sizable and "lumpy" than for Reits, which have spread out theirs.
S&P flagged that more than 40 per cent of the property developers that issued bonds have cash and operating cash flows less than their short-term debt maturities. Of these, only half have liquidity of less than 0.5 times the short-term debt maturities, and are then left with minimal working capital buffer.
The report cited no specific names but The Business Times' screening of property counters found that among developers with bonds outstanding, companies with short-term debt maturities exceeding cash and operating cashflows include Heeton Holdings, TA Corporation, Aspial Corporation, Oxley Holdings and Perennial Real Estate. But Oxley and Perennial, which are both above S$1 billion in market cap, have an interest coverage ratio of more than one.
While some Chinese developers listed here also have weak liquidity and debt metrics, majority do not issue bonds here. Ying Li Real Estate's S$200 million convertible bonds matured last year.
"The ability of these developers to refinance or push back debt maturities is therefore the key default differentiator," said the S&P analysts. "This ability is also predicated on the health of the underlying property market."
However, property prices have declined about 9.4 per cent from their height in 2013, and substantial supply overhang continues; on a rolling 12-month basis, developers' liquidity has deteriorated.
Smaller developers (with a market cap of S$1 billion or below) that are stricken with high leverage and weak liquidity have about S$1.4 billion of bonds outstanding. Their median debt-to-Ebitda (earnings before interest, tax, depreciation and amortisation) ratio is more than 20, with short-term debt maturing within the next year amounting to S$3.1 billion.
Liquidity sources for most of these companies are less than their liquidity uses in the next 12 months, S&P pointed out.
Compared with regional peers, developers in Singapore have also seen their leverage on domestic currency bonds grown more rapidly, with their median ratio of gross debt-to-Ebitda above 11 for the past three years.
Chinese developers rated by S&P had a median debt-to-Ebitda ratio of about 6.8 in 2015, and the median rating for this group is "BB". Likewise for Indonesian developers, the ratio was 3.7 in 2015, and the average rating is "B", reflecting their small size.
"We believe that leverage for Singapore real estate issuers is unlikely to improve any time soon," the S&P analysts said. "Their debt is very high, and reduction will require either a substantial increase in operating cash flows, a dramatic cut in capital spending, or an equity infusion, which is not prevalent at present."
The Business Times