by Lee Su Shyan, Assistant Money Editor

TEMASEK Holdings is capitalising on buoyant financial markets to sell bonds that will raise hundreds of millions of dollars for its activities.

The 10-year bond issue - marking only the second time the company has tapped the bond markets for financing - comes after a difficult year in global equity markets for the investment firm.

Temasek unit Temasek Financial, which will issue the notes, said yesterday that it 'intends to provide the net proceeds... to Temasek and its subsidiary companies to fund their... business.'

While Temasek did not specify the issue amount, it said it was a benchmark offering, which usually refers to deals over US$500 million (S$695 million).

Its first issue - for US$1.75 billion due in 2015 - was issued to investors in 2005 at a 4.5 per cent coupon rate.

The new issue benefits from low global interest rates, and with Temasek's strong credit standing should mean Temasek will pay an attractive rate for the funds.

Temasek's bankers - Goldman Sachs, Deutsche Bank and Morgan Stanley - are marketing the bonds, with the amount and pricing to be announced as soon as today, say observers. Demand for the bonds is tipped to be strong.

Dow Jones Newswires said the size of the bond issue is likely to be in the region of US$1 billion, quoting a person familiar with the deal.

Some market observers are speculating if Temasek needs to raise more funds, following the losses on its portfolio after selling stakes in Bank of America and Barclays over the past year.

The recent Temasek Review, the company's annual report, showed that the firm's portfolio had slipped to $130 billion as of March 31, compared with $185 billion a year earlier.

However, much of those losses have been pared, with the portfolio recovering to $172 billion as of July 31.

Temasek chief executive Ho Ching said last month that the investment firm's cash position was strong: 'We have been building up our liquidity methodically over the last two years with a net cash position as we were mindful of a possible downturn.'

Temasek-linked companies are also in a comfortable financial position.

Ms Ho added that 'our portfolio companies are well-positioned to ride out the crisis, especially in terms of their liquidity and financing needs'. But funds may be required for investments in the future. She also said: 'At the same time, we continue to invest steadily and selectively.'

This programme of continued investment is likely behind the new bond issue.

Temasek remains optimistic on Asia as a growth region and has plans to expand its investments in Asia and other growth areas such as Latin America.

The notes have been rated AAA by Standard & Poor's (S&P) and Aaa by Moody's Investors Service, similar to the rating given to the first tranche of notes. Temasek itself also has an AAA rating from S&P and Aaa from Moody's.

S&P said the high rating 'reflects its very strong liquidity position, highly diversified and liquid investments'.

It added that 'most of Temasek's major investments have strong business risk profiles, with steady and sustainable cash flows'.

Risk-wise, Temasek's portfolio is highly diversified, with no single investment accounting for more than 17 per cent of the portfolio value.

However, S&P cautioned that about one-third of Temasek's investments are exposed to the financial sector, which adds volatility to its investment portfolio.

In addition, S&P said Temasek's exposure to emerging Asia has grown over the past few years, adding higher country, legal and regulatory risks to its portfolio.

Economist David Cohen from Action Economics said: 'The triple A rating for the notes reflects what will most likely be a favourable reception from investors.

'Market sentiment has calmed down from a year ago and it shows that it hasn't affected Temasek's rating. It shows that investors still appreciate the quality of Temasek's assets.'

A fixed income analyst said: 'With US Treasuries and other benchmark notes offering low yields, this will be an opportune time for Temasek to lock in 10-year funding at a relatively low price.'

He added that he expects the response from investors for the bonds to be strong: 'There is always strong demand for good quality bonds. So we expect to see some fairly tight pricing.'

Temasek is looking to pay a spread of low-100 basis points, or hundredths of a percentage point, over the comparable US Treasury yield, Dow Jones Newswires added, quoting a source.

Temasek has said that getting a credit rating from the rating agencies is one way of getting additional markers of its financial position and credit risks. Ms Ho likened the bond spread to 'a singing canary in the coal mine'.

She had also said Temasek hoped to establish a series of bonds of different tenures for a more nuanced signal over the longer term.

This article was first published in The Straits Times.