Thus far, 2023 has been a year of clashing signals, creating sustained but prudent activity. Healthy liquidity in the Singapore banking system has been tempered by concerns over sustained inflation and uncertainty over interest rates. Concerns over a recession have also led to a focus on quality assets and accordingly, cautious loan growth.
While not strictly regulatory, the growing understanding of the role that lenders can play in global sustainability efforts has also led to lending policies targeted at improving such efforts, whether through industry focus (such as renewables and the circular economy) or loan offerings (such as green and sustainability-linked loans specifically adapted for a broader range of industries).
Singapore in general has had limited direct exposure to the Ukraine war. The introduction of new sanctions was an immediate direct impact, but otherwise, the impact was primarily felt through knock-on indirect effects. The full impact of the war itself may have been somewhat weakened for geographically-distant jurisdictions with limited direct exposure in the context of economies emerging out of an extended pandemic, especially for industries particularly affected by COVID-19.
In comparison to past years where adoption of unitranche and term loan B loan structures was gradual, 2022 saw an increased interest in such structures with the narrowing of pricing gaps between such structures and senior debt. While a number of significant Asian brand names have accessed term loan B markets for capital, these remain relatively rare in Singapore in comparison to senior debt.
Mezzanine and second lien financings continue to feature, with an uptick arising from the increased entry of investors into Singapore with a focus on, or mandates to invest in, such debt. Mezzanine and second lien debt backed by real estate assets remain particularly popular among lenders and investors.
Alternative credit providers continue to flourish in Asia, providing loans not just for under-banked and new industry borrowers who may not be finding it easy to access bank debt. These have ranged from P2P lending structures, to private debt providers offering terms akin to senior debt, but focusing on emerging Asian economy borrowers with less access to traditional bank debt capital. Both inbound and outbound alternative credit have seen significant activity.
In particular, with start-ups and early-stage companies from the 2010s and 2020s maturing and finding dilution or downrounds in the current climate unpalatable, there has been a flurry of activity in alternative credit providers (including specialist investors, and investors with broadened mandates) stepping in to provide debt financing to such maturing companies where conventional bank financing would otherwise still be difficult to obtain.
Loan products and offerings have become increasingly tailored to the needs and requirements of industry.
ESG and sustainability-linked lending in Singapore have expanded significantly beyond traditional benchmarks for real estate industries to focus on targets reflective of the efforts of borrowers and the industry they operate in; examples include ESG targets on investments for financings offered at the fund level, to social sustainability targets (such as labour) for manufacturing and primary industries.
Late growth-stage start-ups have also enjoyed increased availability of debt funding at holdco levels in recognition of the multi-jurisdictional operations for many of these companies. Financial covenants are usually structured to allow for growth while still measuring financial health for debt service, with equity kickers also featuring. Where appropriate, such companies have also been able to tap into asset-based financing, particularly where lenders have now gotten comfortable around the contractual structures underpinning the cash flow and assets (such as receivables primarily derived from electronic transactions) where once such structures were traditionally limited to production of physical goods.
These have necessitated reconsideration, development and adaptation of conventional loan documentation to develop bankable loan structures reflecting the actual operational requirements and needs of principals.
Previously focussed primarily on real estate, ESG and sustainability-linked lending in Singapore has grown to cover broader industries in recognition of the need for sustainability, and the role that financing plays in sustainability. Structures are based on the requirements of the Green Loan Principles and Sustainability-linked Loan Principles, and are heavily tailored to reflect meaningful goals for the particular industry in which a borrower operates.
Separate from product offerings, lenders in Singapore have also focussed financing efforts on industries which promote sustainability and ESG efforts including renewables, decarbonisation (such as adoption of electric vehicle fleets) and the circular economy.
More recently, there has also been some attention on social aspects of ESG, with some Social Loans being structured based on the Social Loan Principles, particularly with a focus on healthcare.
In Singapore, banks are generally required to be licensed under the Banking Act 1970, to operate banking and other businesses in Singapore permitted under its licence. Such licensed banks and other categories (eg, finance companies) are excluded from the Moneylenders Act 2008, which otherwise generally applies to regulating the business of moneylending in Singapore, unless exempted. Excluded moneylenders include any person who lends money solely to corporations.
See 2.1 Providing Financing to a Company.
While there are no general restrictions on the granting of security or guarantees to foreign lenders, the terms of certain private agreements may impose conditions or restrictions. For example, taking security over industrial land leased from the Jurong Town Corporation (or over such leases) may be subject to a consent requirement from the Jurong Town Corporation if security is granted to persons that are not financial institutions permitted by the laws of Singapore to lend on such security.
While there is exchange control legislation in the Exchange Control Act 1953, the Monetary Authority of Singapore Notice 754 exempts all persons from the provisions, obligations, etc, imposed under various sections of the Exchange Control Act 1953.
The use of proceeds is generally regulated by contract and is largely unrestricted. Some general restrictions against illegal purposes include use of the proceeds in breach of sanctions, anti-terrorism financing and anti-money laundering rules. Another important restriction would be financial assistance rules which prohibit a public company or a subsidiary of a public company in Singapore from taking financing to assist the acquisition of its shares or shares in its holding company. If the purpose of the loan or the loan itself was illegal or prohibited, it renders the loan unenforceable and there would generally be no recovery other than on a restitutionary basis under very limited and strict conditions (as set out in Ochroid Trading Ltd v Chua Siok Lui).
Agency and trust concepts are recognised in Singapore.
Loan transfers are primarily conducted by way of novation, and syndicated facilities would typically have a form of transfer certificate included to effect novations of debt. A secured syndicated facility would typically have a security agent or security trustee holding the benefit of such security for the pool of syndicated lenders. Other transfer mechanics include those common to other jurisdictions such as risk- and other sub-participation mechanics.
Debt buy-back by the borrower or sponsor is generally regulated by contract. Loan documentation has seen an increased adoption of either an outright prohibition against sponsor buy-backs or disenfranchisement of sponsor-affiliated lenders, with an increased presence of both sponsor-affiliated lenders and sponsor buy-backs; the latter featuring also as part of certain debt restructurings, especially in recently beleaguered industries where conventional lenders have reduced their exposure.
“Certain funds” provisions are common for public acquisition finance transactions in Singapore and are also adopted in the financing of the acquisition of private companies in Singapore in particular cases. Long-form documentation is commonly used for acquisition finance transactions (even at the term sheet stage, with long-form term sheets commonly prepared). Other than for the usual security registration requirements for Singapore-incorporated security providers, facility agreements for acquisition finance transactions are not required to be filed in Singapore where the target is Singapore-incorporated.
See 1.5 Banking and Finance Techniques.
While the Moneylenders Act 2008 does impose maximum interest (ie, a nominal interest rate of 4% per month), banks and other excluded lenders are not subject to such restriction. Contractual provisions providing for the payment of additional or an increased rate of interest may not be recoverable if they amount to a penalty under Singapore law, and the Supreme Court Practice Directions generally provided that every judgment debt shall, unless otherwise agreed between the parties, carry interest at the rate of 5.33% per annum, or at such other rate as the Chief Justice may from time to time direct, or at such rate not exceeding that rate as the Singapore court directs. With respect to penalty considerations, an 18% default interest rate was held to be a penalty in Hong Leong Finance Ltd v Tan Gin Huay.
While there are no general rules for disclosure of all loan agreements, there may be requirements particular to specific entities. For example, borrowers which are subject to SGX Listing Rules are required to disclose details of conditions in loan agreements that refer to – eg, shareholding interests of any controlling shareholder, REIT manager or trustee-manager, or a restriction on any change in control of the borrower, REIT, REIT manager or trustee-manager, or on any change of the REIT manager or trustee-manager, as well as the level of facilities that may be affected by a breach of such condition.
Singapore does not generally subject payments of principal to withholding tax. Payments of (or in the nature of) interest or other payments in connection with the loan may be subject to withholding tax under the Income Tax Act 1947, depending on the relevant jurisdictions.
Security over shares and real property are generally subject to stamp duty of up to SGD500 in Singapore. Fees may be charged by government authorities for security registrations such as registrations with the Accounting and Corporate Regulatory Authority and the Singapore Land Authority; these fees are generally nominal.
Singapore-incorporated borrowers will need to consider – eg, withholding tax considerations and the applicability of double-taxation agreements, when borrowing outside Singapore from foreign lenders.
One of the most common assets taken as security in Singapore is real estate. Where separate title has been issued for real estate, a mortgage over such real estate can be taken as security in the form prescribed by the Singapore Land Authority. A real estate mortgage will need to be stamped for up to SGD500 in Singapore within 14 days of execution and delivered for registration to the Singapore Land Authority with the title documents in relation to that property and payment of a nominal registration fee to the Singapore Land Authority. Failure to have the document stamped renders it inadmissible in court, and late stamping is subject to financial penalties.
Share security over shares issued by a Singapore-incorporated company is also common. Customary deliverables and perfection steps differ depending on whether those shares are issued by a private or public Singapore-incorporated company and, in the latter case, may differ further depending on how those shares are held. Share security is subject to stamping of up to SGD500 in Singapore.
Singapore also permits floating charges over all present and future assets of a Singapore-incorporated company; such security would commonly be taken by way of a general debenture. This would usually be drafted to cover all assets, including shares and real estate, and would similarly need to be stamped for up to SGD500 in Singapore.
Registration of Securities
Particulars of security created by a Singapore-incorporated company are generally registrable in Singapore with the Accounting and Corporate Regulatory Authority for a nominal fee of SGD60. The Companies Act 1967 prescribes categories of registrable security but these are generally very broad. Registration needs to be completed within 30 days of execution if executed in Singapore. Failure to register results in such security being void against the liquidator and creditors of that security provider.
Stamping and registration of particulars of security in Singapore are generally conducted through the online systems of the relevant government authority and are fairly instantaneous. As a matter of practice, however, parties generally buffer one to three business days to complete these, to account for contingencies and disruptions.
Singapore permits floating charges over all present and future assets of a Singapore-incorporated company.
Subject to considerations of corporate benefit, particularly in the case of upstream and cross-stream guarantees, it is not unusual for lenders to take such guarantees. Other limitations include the financial assistance rules, mentioned in 3.4 Restrictions on the Borrower’s Use of Proceeds, in relation to provision of guarantees by a Singapore-incorporated public target or its subsidiaries supporting the acquisition of shares in itself or its subsidiaries; restrictions in the Companies Act 1967 on the giving of guarantees covering indebtedness of corporate entities not within the same group structure; as well as any restrictions imposed by a company’s constitutive documents or private contracts. If guarantors are not within the same group structure (ie, they do not share the same holding company), parties will also need to consider whether the guarantee structure contravenes the Companies Act 1967 prohibitions on the granting of guarantees by a company to third parties that are connected with the directors of that company.
Financial assistance restrictions apply where the target is a Singapore-incorporated public company or subsidiary thereof. The Companies Act 1967 provides for several whitewash methods and exclusions. The most common whitewash methods include a long-form whitewash which takes at least a month in practice and involves public notifications; and one of the short-form whitewash methods which requires statutory solvency statements from the directors of the company providing financial assistance.
Other than the above, greater diligence is usually required for regulated security providers. Licence terms and legislation may prohibit or set conditions on the granting of security or guarantees. For example, the Securities and Futures (Licensing and Conduct of Business) Regulations set conditions on the creation of security by a capital markets services licence holder over its customer’s assets. Housing developer licences may also contain restrictions over liabilities, which may be secured by a mortgage over the housing property to be developed. Where contracts and contractual proceeds are a key component of a security package, contractual restrictions against assignment and creation of security are critical. In such cases, diligence and the actions required to obtain consent where possible become significant (but not always insurmountable) hurdles in the feasibility assessment of such security.
Singapore law-governed security is typically released by a deed of release or deed of discharge, save where security was taken in a prescribed statutory form (eg, a Singapore statutory mortgage), where local authorities may similarly prescribe statutory forms of release.
The rules of priority of competing security interests in Singapore are complex. Between the same type of registered security interests, the security interest created first in time generally has priority. This is then complicated by priority between different types of security interests; for example, a perfected legal assignment would generally take priority over an unperfected equitable assignment, and floating charges rank behind fixed charges. Contractual subordination of claims is a common contractual structure adopted in Singapore law financings where senior creditors, subordinated creditors and the borrower enter into a contractual subordination deed setting out the relevant priorities.
In an insolvency of a Singapore-incorporated company, the Insolvency, Restructuring and Dissolution Act 2018 provides for certain payments to be paid out in priority to unsecured debts. These are mandatory and generally include wages and salaries, retrenchment benefits, work injury compensation and tax.
The Insolvency, Restructuring and Dissolution Act 2018 also provides that the Singapore court may make an order for “rescue financing” for a company which has applied for a scheme of arrangement or in judicial management, to be accorded with super priority in a winding up or (where the company would not have been able to obtain the rescue financing from any person unless secured and there is adequate protection for the interests of the holders of existing security interest) with higher priority security. In the context of judicial management, a lender with security over the whole (or substantially the whole) of the company’s property and which is, or may be, entitled to appoint a receiver and manager of such assets, may oppose the making of an order for judicial management, and if so opposed, the court must dismiss an application for such order.
Typically, Singapore law-governed security documents will provide that a secured lender can enforce its collateral upon the occurrence of a trigger event; this is usually either an “event of default” or an “acceleration event”. Initial and usual enforcement remedies are primarily self-help (eg, letters of demand, appointments of private receivers where contractually provided) with court processes (eg, winding-up, injunctions, court-appointed receivers) also available to supplement such self-help remedies. Insolvency and restructuring-related processes could trigger moratoria on enforcement, and insolvency legislation also limits enforcement of certain contracts solely by virtue of insolvency (ie, restrictions on ipso facto clauses); these are further detailed in 7.1 Impact of Insolvency Processes.
The choice of foreign law to govern contracts is generally upheld by Singapore courts, but would not be recognised if the choice of law was not bona fide and legal, or if there were reasons for avoiding the choice of law on the grounds of public policy. Singapore has passed the Choice of Court Agreements Act 2016 to give effect to the Convention on Choice of Court Agreements. This provides a statutory framework for recognising and upholding exclusive choice of court agreements designating the courts of contracting states. Contractual waivers of immunity are frequently included in Singapore law-governed finance documents.
The Choice of Court Agreements Act 2016 also provides the statutory framework for recognising and enforcing judgments of the foreign courts of other similarly contracting states designated in exclusive choice of court agreements, subject to the exceptions in the Convention on Choice of Court Agreements. This is supplemented by prior legislation such as the Reciprocal Enforcement of Foreign Judgments Act 1959, which recognises certain foreign judgments from the specified foreign jurisdictions, which may not have been covered by the Choice of Court Agreements Act 2016. For international arbitral awards, the International Arbitration Act 1994 gives effect to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards and provides that the relevant arbitral awards may be enforced and judgment entered with the permission of the court.
There are generally no restrictions requiring a lender to be authorised or qualified to carry on business in Singapore solely to enforce its rights under a valid loan agreement or security agreement.
The Insolvency, Restructuring and Dissolution Act 2018 provides for moratoria in certain insolvency-related situations (eg, if a Singapore-incorporated company is placed under judicial management and placed under a scheme of arrangement). Such moratoria would generally restrain proceedings and enforcement of security against that company. For a scheme of arrangement, an automatic worldwide moratorium applies for 30 days from the date that the relevant application is made.
The Insolvency, Restructuring and Dissolution Act 2018 also restricts the exercise and enforcement of ipso facto clauses in contracts which allow for termination, acceleration, etc, by reason of insolvency or commencement of insolvency proceedings. Certain specified contracts are excluded from the ambit of the restriction. However, there is no broad exclusion for all types of loan and security agreements.
Secured creditors are generally paid in order of priority to the extent of the security. Otherwise, when a Singapore-incorporated company is wound up, certain preferential debts must be paid before all other unsecured debts. Key preferential debts include:
Schemes of Arrangement
The length of the process and recovery for creditors varies depending on the circumstances and specific terms of the particular scheme of arrangement.
Judicial management typically lasts for 180 days from the date of the court order or creditors’ meeting approving the appointment of a judicial manager. The judicial management can be extended by an application to court by the judicial manager or by the approval of a majority in number and value of the creditors. Recoveries to the creditors is highly dependent on the assets available to the debtor company and any proposed restructuring plan put forward by the judicial manager.
The length of the process and recovery for creditors varies depending on the circumstances (including time taken to realise assets and adjudicate proofs of debt) and the unencumbered assets available for distribution.
Rescue and reorganisation procedures in Singapore include the following.
Schemes of Arrangement
This is a statutory restructuring process whereby a company and its creditors seek to agree on a restructuring scheme to be court-sanctioned and eventually approved. The Insolvency, Restructuring and Dissolution Act 2018 introduced new features such as cram-down provisions to empower the court to approve schemes in certain cases, despite dissenting classes of creditors and pre-packaged restructuring plans, without the need to convene creditor meetings.
This is a restructuring option similar to the English administration regime. Judicial management in Singapore is intended to rehabilitate a company where liquidation or winding-up would be less advantageous. The Insolvency, Restructuring and Dissolution Act 2018 introduced changes to allow foreign companies with a substantial connection to Singapore to apply for judicial management and also to limit a secured creditor’s right to veto judicial management orders.
Both options feature statutory moratoria on debt enforcement in order to give the company breathing space while it proceeds with the reorganisation process.
The Insolvency, Restructuring and Dissolution Act 2018 also introduced the possibility for distressed companies to obtain fresh finance while undergoing reorganisation. A distressed company can make an application to the court for an order granting super-priority status to debts arising from the rescue financing; such orders could include the granting of priority over all other preferential debts, or allow the creation of a security interest over existing encumbered assets and the subordination of any existing security interests.
In this connection, the court has also approved the “roll-up” of a rescue lender’s pre-existing debt into a super-priority debt. This is achieved through applying a portion of the rescue-financing proceeds towards repayment of the rescue lender’s pre-existing debt.
As mentioned in 7.1 Impact of Insolvency Processes, lenders need to tackle new considerations arising from the Insolvency, Restructuring and Dissolution Act 2018. These include the restriction on enforcement of ipso facto clauses. In certain cases, parent guarantee provisions have been bolstered in attempts to address such ipso facto restrictions and to ease and allow enforcement for parent companies falling outside the scope of the restrictions. Additional considerations from the Insolvency, Restructuring and Dissolution Act 2018 include those mentioned above, such as new moratoria provisions (eg, the automatic 30-day worldwide moratorium for schemes of arrangement), and the introduction of cram-down provisions and priorities granted to rescue financings. Coupled with the ability of foreign companies (not just Singapore-incorporated companies) to seek restructurings in Singapore under the Insolvency, Restructuring and Dissolution Act 2018, where qualified, and the adoption of the UNCITRAL Model Law on Cross‑Border Insolvency, it has becoming increasingly important, if not already absolutely crucial, for lenders to come to terms with the insolvency and restructuring regimes in Singapore.
Singapore project finance activity is primarily out-bound with both the public and private sectors actively working together to further cement Singapore’s status as an infrastructure financing hub providing financial, advisory and other services across the entire value chain and from conception to financial close. Major industries benefiting from the expertise include renewables and transport. The depth of project finance activity has also led to multiple launches of project finance securitisations in Singapore.
Given Singapore’s geographical footprint, where debt is required for domestic infrastructure projects in Singapore, these have been historically well-funded by banks or the public sector. The introduction of the Significant Infrastructure Government Loan Act 2021 further allows the Singapore government to borrow up to SGD90 billion to pay for qualifying infrastructure projects.
The three main sources of laws, regulations and guidelines for PPP transactions in Singapore are the Public Private Partnership Handbook, the Government Procurement Act 1997 and the Government Procurement Regulations 2014. With the introduction of the Significant Infrastructure Government Loan Act 2021, it remains to be seen what impact this will have on projects which may otherwise have been structured as a PPP, or whether the PPP model will continue primarily for specific projects such as existing use cases which have demonstrated success.
Project documents for domestic projects in Singapore are usually Singapore law-governed with disputes resolved in Singapore. In the case of project financings led out of Singapore for projects located in other jurisdictions, the general preference remains for the underlying project documents to be Singapore law-governed or English law-governed with disputes resolved in the relevant courts or an acceptable arbitral venue unless prohibited by local laws.
Although foreign companies intending to conduct business in Singapore are required to be registered in Singapore and if so registered, may own real property in Singapore, given the ease and benefits of incorporation in Singapore, most (if not all) project companies for domestic infrastructure projects are incorporated in Singapore even where projects are awarded to consortiums comprising foreign investors.
A project company for a project in Singapore would typically be a Singapore-incorporated company incorporated under the Companies Act 1967. Restrictions may be imposed by the relevant project documents, and qualifications and restrictions would typically have been clarified as part of the tender process. Historical PPPs have included project companies formed by a consortium of local and foreign investors.
As mentioned in 8.1 Recent Project Finance Activity, project financing lending in Singapore has largely been outbound, with lenders primarily being banks and multilaterals. Given Singapore’s geographical size, where debt is required for domestic infrastructure projects, these have been historically well funded by banks or the public sector.
Given Singapore’s geographic characteristics, the extraction of natural resources is not a feature.
The key regulator on broad environmental matters is the National Environment Agency, and on health and safety laws, the Ministry of Manpower. Projects might also involve other regulatory bodies depending on the type of project.
Generally, the following environmental, health and safety legislation would apply broadly to projects:
Soaring inflation, rising interest rates and global supply chain disruption owing to geopolitical tensions saw Singapore’s GDP growth numbers halved from 7.6% in 2021 to 3.8% in 2022. The outlook for Singapore in 2023 is expected to remain challenging as Singapore’s economy narrowly avoided a recession in the second quarter of 2023, and growth forecasts for 2023 have been trimmed on the back of weak global demand.
The uncertain climate has driven Singapore companies to implement a variety of cost-cutting measures as they look to slow down or put expansion plans on hold and move to stabilise their balance sheets.
The increased borrowing costs resulting from the high interest rate environment have led to borrowers facing challenges in servicing existing loans and being more cautious in taking on new loans, culminating in a contraction in business lending in Singapore by 0.8% in 2022.
The move to risk-free rates as the new benchmark interest rate in the context of Singapore financings (which saw many borrowers in Singapore amending their existing facilities over the span of a lengthy transition period to cater for the introduction of these risk-free rates) has largely been completed, with the Singapore Dollar Swap Offer Rate (SOR), the USD London Interbank Offered Rate (USD LIBOR), and the London Interbank Offered Rate (USD LIBOR) being discontinued earlier in 2023.
Other notable trends and developments in the Singapore financing scene include a general slowdown in the real estate as well as acquisition financing sectors, the increased prevalence of green and sustainability-linked loans, the emergence of transition financing, growing interest in peer-to-peer lending, and the anticipation of an increase in the popularity of Islamic financing in the near future. These trends and developments and others are discussed in more detail below.
Real Estate and Development Financing
Activity in Singapore’s development financing sector remains slow, given the state of Singapore’s property market. While the market saw some positive developments in the first quarter of 2023, particularly for commercial property sales, the last few months have demonstrated that full recovery in this sector may be some time away (in the second quarter of 2023, real estate investment volume totalled SGD3.495 billion, which was a fall from the SGD6.068 billion invested in the first quarter of 2023. In comparison, the first half of 2022 saw SGD19.193 billion in such investments).
This cautious sentiment has its roots in global macroeconomic factors. Interest rate volatility has made loan financing less attractive to investors, prompting them to adopt a warier approach in the hope that interest rates may stabilise later in 2023. In particular, the collective sale market has been affected by the high interest rate environment, with only five successful collective sales in 2023 (a collective sale involves the sale of multiple property units to a common buyer, and requires consent exceeding a stipulated threshold from existing owners). For private residential collective sales, homeowners have generally been unwilling to price their developments lower given the high replacement costs that they face, with developers being unwilling to match the prices due to the costs of financing. The convergence of these two factors has resulted in the ongoing deadlock between developers and homeowners over collective sale prices. Until interest rates stabilise, more cautious developers may delay investing in projects within the residential real estate market, tempering the demand for development financing.
Despite relative instability in the macroeconomic environment and the general slowdown in the financing sector, development financing is still sought by developers in relation to industrial real estate. With industrial property in tight supply, this presents an opportunity for developers to meet demand by acquiring land launched through the Ministry of Trade and Industry’s Industrial Government Land Sales Programme. The participation of such developers in land sales may well provide a boost to development financing in the second half of 2023, when land zoned for industrial activity is put up for bidding.
Green Loans and Sustainability-linked Loans
Green loans and sustainability-linked loans (SLLs) have seen a surge in popularity over the past few years as greater emphasis continues to be placed on the accountability of businesses and corporate actors for environmental, social and governance (ESG) issues (with global credit-rating agencies beginning to differentiate credits based on ESG attributes). The adoption rate of SLLs for development financing in particular has been healthy, with companies and REITs in the real estate sector accounting for 46% of green or sustainability-linked debt in 2021.
Green loans remain highly relevant in the market, with Singapore companies borrowing up to USD39.5 billion in green loans as at the end of 2022.
In Singapore, green loans feature prominently in property and development financings owing to a confluence of factors such as the presence of a robust certification scheme for green buildings and the Singapore Green Building Masterplan, under which the nationwide target is for 80% of buildings to be certified green or to have best-in-class energy efficiency by 2030. There has also been an increase in government incentives in the Asia-Pacific region for property developers to focus on sustainable developments, which may be attributable to the growing awareness of the vulnerability of urban areas to climate issues.
Prominent green property financing transactions in Singapore include the largest syndicated green loan financing in Asia as at the date of completion – an SGD3 billion financing of the mixed-use project development at 8 Shenton Way (slated for completion in 2028), which will become Singapore’s first supertall building (ie, over 300 metres in height) when completed, redefining the landscape of Singapore.
SLLs have seen an increase in popularity across various sectors in Singapore, including real estate and project financing. In the real estate sector alone, SLLs and ESG-linked loans totalled SGD75 billion in 2021.
Growth in these sectors is in a large part attributable to the Singapore government’s creation of a regulatory framework within which issuers and borrowers of SLLs can work, particularly in relation to ESG reporting.
The government has also provided numerous incentives to buttress the attractiveness of green loans and SLLs, such as the launch of the Green and Sustainability-Linked Loan Grant Scheme (GSLS) in 2020 by the Monetary Authority of Singapore (MAS) to reduce costs for engaging sustainability advisers and co-funding the development of SLL frameworks for small and medium enterprises (SMEs) and individuals. As at the date of this article, the MAS has announced that it will be injecting an additional SGD15 million to increase and enhance the scheme (which will be expanded to include transition bonds and loans) and be extended up to 31 December 2028.
SLLs are also popular with borrowers because of the sustainability margin adjustment mechanism that is a fundamental feature of SLLs (upon satisfying pre-designated Sustainability Performance Targets, borrowers are able to enjoy reduced margins which will, in turn, reduce their funding costs).
Another key factor is the support of Singapore’s major banks, with DBS Bank Ltd., Oversea-Chinese Banking Corporation Limited and United Overseas Bank Limited planning to avail between SGD30 billion to SGD50 billion each in SLLs by 2024. Each of these banks has exceeded their initial SLL projections. Noteworthy financings include the grant of an SGD1.2 billion SLL to Sembcorp Financial Services Pte. Ltd. by a group of banks including DBS Bank Ltd. and Oversea-Chinese Banking Corporation Limited for, amongst others, the financing or refinancing of renewable energy and other sustainable projects. United Overseas Bank Limited has also recently granted a TWD1 billion (SGD42 million) SLL to CHIMEI Corporation, which specialises in producing a variety of high-tech synthetic rubbers, specialty chemicals and performance materials including those covered by EcologueTM. Such loans are indicative of a shift from traditional non-sustainability-linked loans towards SLLs.
Project Finance – Transition Finance
With the Singapore government’s commitment to achieving net zero emissions by 2050, it has been recognised that green loans and SLLs, whilst important, are, on their own, insufficient to achieve this goal. Borrowers in high-emitting sectors, such as aviation and energy generation, in particular, would find it challenging to take up green loans and SLLs given the nature of their industries. This has led to the emergence of “transition finance”, which generally refers to the investment, lending, insurance and the provision of other related services to gradually decarbonise high-emitting industries such as power generation, buildings and transportation.
At the end of the first half of 2022, 53 transition use-of-proceeds bonds have been issued, with issuance mainly coming from issuers based in Japan and China due to the efforts made by the regulators in those countries to spur transition financing.
The MAS has recently updated and expanded the Green Finance Action Plan, which was introduced in 2019. The refreshed plan is titled Finance for Net Zero Action Plan (“FiNZ Action Plan”) and its scope is widened to not only cover green financing but also transition financing. The FiNZ Action Plan envisages four strategic outcomes, as outlined below.
More reliable and comparable climate and sustainability data
First, MAS plans to ensure that climate and sustainability data are more reliable and comparable to allow financial market participants to be able to better assess their exposure to ESG risks and opportunities. On a cross-border level, MAS also seeks to provide clarity on the nomenclature used in the industry to facilitate effective communication and data comparison, which will, in turn, facilitate transition financing flows across jurisdictions. For example, MAS states that a code of conduct is currently in the pipeline. Working hand-in-hand with the industry, the code will require ESG rating agencies and data product providers to disclose how transition risks are accounted for in their products. The greater transparency from the aforementioned measures will help to alleviate greenwashing concerns.
Climate and environmental risk management practices
Second, MAS will reach out to financial institutions to build good climate and environmental risk management practices. More specifically, and more pertinently for our purposes, MAS will supervise the financial institutions’ response to climate risks and their transition to operating in a low-carbon business environment.
Third, MAS will promulgate the implementation of credible transition plans by financial institutions. Such a plan is one that not only manages the financial institution’s own risks but also contributes towards the decarbonisation of the wider economy. In addition, financial institutions are encouraged to engage with their clients on the measures that they can take to decarbonise their businesses and take reference from sectoral decarbonisation pathways when doing so.
Fourth, as MAS’ existing grant schemes for sustainable bonds and loans proved to be popular (as more than SGD30 billion worth of sustainable debt was issued last year), MAS will be improving on and extending the duration of the schemes to cover transition bonds and loans. So, a company that is obtaining a transition loan with a tenure of at least three years and a loan quantum of at least SGD20 million (or equivalent in another currency) is eligible for a grant of up to SGD125,000 to defray the costs incurred in engaging independent service providers to validate the sustainability credentials of the loan.
Given that Singapore targets to convert 80% of its buildings from “brown” to “green” by 2023 (of which 55% has been completed) and that about 95% of Singapore’s electricity is still being generated from natural gas, transition financing is likely to feature prominently in Singapore in the coming years.
While much focus has been placed on how technological advances are streamlining and improving traditional bank lending, it is also worth noting the role of technology in disrupting traditional bank lending. In recent years, alternative lending, for example peer-to-peer (P2P) lending, has seen growing prevalence in the form of digital platforms directly connecting lenders and borrowers. P2P lending involves directly matching borrowers seeking shorter-term financing, which are often SMEs (SMEs may not be able to procure bank financing as they may not have adequate credit standing or collateral to provide), and lenders, which may be institutional or retail investors, through online platforms that also facilitate the collection, evaluation and transmission of the borrower’s details to these potential lenders.
The ability of SMEs to obtain financing continues to pale in comparison to that of more established borrowers in the market, with the financing needs of SMEs for operations or development far outstripping their access to such financing. This creates a funding gap for SMEs in Singapore which is estimated to be approximately USD20 billion a year. This gap has allowed P2P platforms to engage SMEs looking for a more expedient borrowing process and less stringent requirements. The digital nature of the P2P financing process greatly streamlines loan applications and approval processes. The types of loans disbursed also vary from product to product and can come with flexible terms depending on the lender. From the lenders’ perspective, a big draw is higher interest rates (albeit that this may come with a higher default risk, and a relative lack or absence of security or other credit support).
Several prominent home-grown names in the field include Validus Capital and Funding Societies. Validus, which received contributions totalling USD35 million within five years of its inception from prominent investors such as Temasek-affiliated Vertex Ventures, had disbursed loan amounts totalling over SGD550 million in the same period. Validus has partnered with corporates to enhance the data analytics processes that support the credit assessments of borrowers, eschewing the reliance on traditional financial indicators, which allows them to lend in more volatile sectors that banks typically avoid. Meanwhile, Funding Societies has lent more than SGD3.37 billion across Singapore, Indonesia, Malaysia and Thailand, accounting for one of the largest regional shares in the SME digital financing industry. As a testament to the standing of such P2P platforms, both Validus and Financing Societies have even been approved to disburse government-backed loans under the Enterprise Financing Scheme (helmed by Enterprise Singapore) (EFS), which was crucial in bridging the SME funding gap during the height of the COVID-19 pandemic.
By virtue of their lean operational costs and less stringent credit requirements, P2P lenders tend to benefit from increased popularity when global or regional factors trigger a reduction in credit supply from traditional banks. Interestingly however, Funding Societies noted an increase in traditional banks’ lending share on their platform in 2020 while there was a drop in lending share for alternative lenders in the same period, which the platform attributes to increased governmental support for SMEs through the EFS during that period. This shows that the growing role of P2P lenders in the market in relation to traditional banks is not always a given.
Islamic financing is on the rise worldwide, with such increase in demand expected to feature more prominently in Southeast Asia, one of the largest markets for Islamic financial services.
A specific area of Islamic finance expected to see major growth is Islamic bonds or Sukuks, which are a form of Sharia-compliant financial product that seeks to mirror the coupon payments in bonds. Indeed, it is estimated that a total of USD21.6 billion was raised from Sukuk issuances in Southeast Asia from July 2021 to June 2022. Riding on the greater demand for ESG financial products, ESG Sukuks, in particular, are projected to almost double from making up 2.6% of the global Sukuk market today, to making up 5% of the global Sukuk market in the next five years.
The general consensus in the market is that Singapore is well-positioned to become a global hub for offshore Islamic wealth in the next five years as Singapore is recognised for its premier financial status in Asia-Pacific and its mature business environment, which is able to provide the secondary professional expertise and support required. This is bolstered by MAS’ recent update on the guideline relating to the application of banking regulations to Islamic banking in Singapore issued on 1 July 2022. The updated guideline lays out MAS’ general approach in relation to the regulation of Islamic banking, the admission framework for financial institutions seeking to offer Islamic financial services and the regulatory treatment for Islamic banking products.
While there has been an overall decline in mergers and acquisitions (M&A) activity in 2022, there remains some optimism that there will be at least a 20% increase in incoming cross-border M&A activity in 2023. In addition, there have been several noteworthy developments in this space, such as the following.
Enterprise Financing Scheme, M&A loans
The EFS was rolled out at the end of 2019 by Enterprise Singapore to provide newly-formed SMEs the option to make simplified applications with certain participating financial institutions in order to obtain various types of loans. Among such loan schemes, the EFS – Mergers & Acquisitions loan scheme (the “EFS M&A Scheme”) is particularly popular, as it allows local SMEs to tap into funding for international M&A transactions that they would otherwise be precluded from obtaining. Participating lenders are also partially indemnified against the risk of borrowers’ default, with Enterprise Singapore taking on a 50% risk share (with those meeting certain conditions enjoying a risk share by Enterprise Singapore of up to 70%). The EFS M&A Scheme has since been extended until March 2026 and expanded to include funding for domestic M&A activities. This is indicative of the government’s ongoing commitment to supporting growth in the M&A sector, particularly in light of other EFS loan schemes either being discontinued or not being extended.
Covenant-lite loans are characterised by the paring down or absence of financial or maintenance covenants, such as covenants obliging borrowers to maintain a certain amount of assets or to ensure that their aggregate leverage does not exceed a pre-designated limit. The absence or paring down of such financial or maintenance covenants allows borrowers to focus on other aspects of the loan, particularly value creation. However, in the Asia-Pacific region (including Singapore), banks have thus far shown a preference for stronger covenants, and covenant-lite loans remain uncommon. Instead, other flexible loan structures with covenant-lite features such as Term Loan B (also referred to as institutional term loans or TLB) are more commonly adopted.
Special purpose acquisition companies
Special purpose acquisition companies (SPACs), as publicly listed companies with no business operations, serve as a medium through which investors can look to acquire and list target companies. In the US, SPACs have been immensely popular, with consistent growth in funds raised since 2003, and having raised capital in 613 IPOs and USD160 billion in 2021 alone. In comparison, Singapore only started introducing SPACs (and putting in place SPAC listing regimes) in the latter part of 2021. The relatively late arrival of SPACs together with strict SPAC listing regulations in Singapore (such as a minimum market capitalisation threshold of USD110 million which is significantly higher than the US’ requirement of USD50 million to 100 million), appear to have resulted in the fairly low take-up rate of SPACs in Singapore. Since the listing of the first three SGX-listed SPACs early last year, there have been no new SPACs listed in Singapore. These three SPACs are in the midst of identifying targets to acquire (the “de-SPAC” process), and should these SPACs be successful in meeting their deadlines to de-SPAC by 26 January 2024, the SPAC market may yet receive a second wind.
For further details on the matters discussed in this section, please refer to the Trends and Developments section of the Chambers Global Practice Guide for Acquisition Finance 2023 (Singapore).
While it appears that there will be lingering uncertainty over the global economic outlook at least for the rest of the year, one may expect with reasonable certainty that the Singapore market will be looking to respond and future-proof itself in the face of such challenges. The trends and developments explored above reveal an industry willing to tackle new challenges through industry-wide initiatives. They also spotlight the growing importance of ESG and sustainability, and the introduction of novel concepts to the lending sphere, such as the greater integration of alternative lending platforms and the increased access to funding for SMEs via P2P platforms. Indeed, set against a backdrop of slowing economies in Southeast Asia, Singapore’s three local banks (ie, DBS Bank Ltd., Oversea-Chinese Banking Corporation Limited and United Overseas Bank Limited) posted decade-high profit margins as at the end of 2022, providing some optimism that the Singapore economy will remain resilient and adaptive going into the second half of 2023.