Singapore Strategy - Rising Stress From Firming Interest Rates


Expectations are for the US Federal Reserve to raise the Fed Fund rate in 2H2015. This should correspondingly lead to higher Singapore interest rates as well. We identified listed corporates which have relatively high gearing and low interest cover and highlight here how some of them will be affected.

■ We expect Singapore interest rates to trend up. The 3-month SIBOR is highly correlated with the US Fed Fund rate. With the US Federal Reserve’s Wed 17 Jun statement on track for a rise of the Fed Fund rate in 2H15, the 3-month SIBOR could also see some upside going forward.

The premium of Singapore 10-yr government bond yield over the US equivalent since late 2014 is likely to persist. This would keep the Singapore 10-yr government bond yield high. Corporates in need of funding may need to pay higher interest costs before they can raise the required funds.

■ Higher Singapore interest rates are negative for corporates with high gearing.

We consider 
a) corporates with gearing more than 80% and

b) interest cover of < 5x as relatively higher risk.

Whilst we note that there could be other considerations, we see this as a first filter to pick out relevant companies. Some of these companies could experience higher funding costs with a rise in the Singapore interest rate.

■ Some high geared corporates are cushioned. 

Whilst some corporates have relatively high gearing, their financials could be cushioned by their uniqueness 
a) Croesus Retail Trust (CRT SP, BUY, TP: SGD1.15) has 100% of its debt already hedged and secured at 1.96% for the next three years; 

b) CWT (Under Review) trades commodities which are funded by short-term trade facilities – excluding such trade facilities, adjusted net gearing is a much lower 0.39x; 

c) Ezra (EZRA SP, TRADING BUY, TP: SGD0.34) is doing a rights and convertible bonds issue and will deleverage; 

d) Midas (MIDAS SP, NEUTRAL, TP: SGD0.35), has its debt denominated in CNY and the key interest rate for Midas is the PBOC’s benchmark interest rate, which we expect to trend down over the next few months. (Read Report)

Source : RHB Research

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