Sadly, for a number of Singapore’s individual bond investors, it has been less a case of ‘Crazy Rich Asians’ in recent years, and rather more one of ‘Crazy Poor Ones’.
Since the market started to come under pressure in late 2015, more than a dozen borrowers have defaulted, representing 2.6% of outstanding issuance.
While the percentage is not large, it is almost certainly of no comfort to the scores of retail and high net worth investors who got burnt after failing to take note (unwittingly or otherwise) that a bond could go up and down in value.
The most publicly affected are the estimated 34,000 retail investors who purchased an S$400 million ($291.8 million) perpetual bond issued by Hyflux in 2011. They had been allowed to use their Central Provident Fund (CPF) money to ballot for scrip.
The water treatment company is currently mid-way through a four-and-a-half month extension to a debt moratorium, enabling it to continue discussing a scheme of arrangement with its creditors.
But some market specialists believe that retail investors may only get back 10 to 20 cents on the dollar given their position in the re-payment queue behind the group’s secured bank lenders. And they may end up having to count themselves the lucky ones ahead of investors who used leverage to boost returns.
“No one knows how many retail investors have been wiped out,” one local expert told FinanceAsia.
Hyflux’s 2011 perp is currently trading at a mid-price of around 64 cents on the dollar. Its worst-performing bond, however, is its upcoming 4.6% September 2019 bond issue, which was last seen at around 25 cents on the dollar.
Not far behind is Ezion’s 0.25% perpetual bond at around 32.5 cents on the dollar. The offshore marine group belongs to one of two sectors which came under intense pressure after oil prices collapsed in 2014 – shipbuilding and offshore oil and gas.
During 2016 and 2017, a number of those borrowers successfully managed to extend the duration of their maturing bonds. But their new paper is still trading at distressed levels and 2018's end-of-year rout in oil prices will not have helped them to find new buyers.
For example, KrisEnergy’s 4% August 2023 bond (extended from 2018) is trading at a mid-price of 39 cents on the dollar. ASL Marine’s 6.35% October 2021 paper (extended from 2018) is at roughly 52 cents on the dollar.
One of the main reasons that Singapore has had a problem is because of a relatively low threshold for an investor to classify as affluent: S$300,000 in assets and S$100,000 in cash.
“This means it wasn’t just private banking clients who were affected but priority banking ones as well,” one Singapore-based banker commented. “Sadly, it seems that some of these investors thought a bond was like a time deposit.
“The key issue now is to ascertain whether there was any misrepresentation when investors purchased some of these bond issues,” the banker continued.
The situation may have also been exacerbated by the fact that many individual investors probably drew false comfort from the companies’ stock exchange listings and Singapore’s reputation as a bit of a nanny state.
However, Singapore’s domestic bond market has always been deliberately modelled on the global Reg S bond market. This openness and sophistication is what has made the city state a thriving regional and international financing centre.
“What happened in the Singapore dollar bond market was, unfortunately, an extension of what was happening in US dollar market where Asian private banking clients were eagerly snapping up high yield issues with 6% plus coupons,” said Clifford Lee, head of fixed income at DBS.
Unsurprisingly, DBS is one of the banks at the forefront of trying to make sure that Singapore learns from its mistakes.
On the private banking side, it has paid for legal advice to help those affected. The Securities Investors Association is also providing pro bono legal advice to individual investors who do not have the clout or the legal co-ordination abilities of their institutional counterparts.
Few would disagree that the future for individual investors lies with improved disclosure, education and for high net investors - access to fixed income research.
Over the past few years, the Monetary Authority of Singapore (MAS) has also been trying to broaden ‘safer’ fixed income investment options for retail investors through a number of initiatives.
In the summer, it acted as a seed investor in the city state’s first Singapore dollar-denominated corporate bond exchange-traded fund (ETF), managed by Nikko Asset Management Asia.
In December, it also doubled an individual’s investment limit in Singapore Savings Bonds (SSB) from S$100,000 to S$200,000 after allowing its citizens to use their Supplementary Retirement Scheme Funds in addition to their Central Provident Scheme Funds.
The SSB scheme encourages investors to hold onto bonds by giving them a return tied to five-year government bonds if they hold them for five years, and to 10-years if they hold them until that point.
TEMASEK AS STANDARD BEARER
In 2016, the MAS also paved the way for retail investors to buy corporate bonds in a more structured environment through a twin bond seasoning and exempt bond issuer framework, which was based on a UK template.
Specifically, outstanding bond issues can be re-denominated into smaller lot sizes after they have been listed on the Singapore Exchange (SGX) for at least six months. Issuers can also offer new paper to retail investors on the same terms as seasoned bonds without a prospectus.
The first issuer to take advantage of this has been Temasek Holdings, which executed an S$500 million 2.7% five-year bond in mid-October after conducting extensive investor education among retail investors.
The deal had a standard S$200 million institutional tranche. But more importantly, it also had an S$300 million retail tranche. This was upsized from S$200 million on the back of S$1.68 billion in demand.
Temasek has helped the government to usher in a new chapter for the market.
Will other issuers follow suit? Certainly, a number of Singapore’s state-linked companies are likely to do so as part of their efforts to connect with the public.
The MAS has also been trying to improve disclosure by encouraging more local companies to get a credit rating. In April 2017, it launched an S$400,000 subsidy scheme to cover the upfront rating costs.
Take up, however, has not been strong given the ease of access that local companies have to the syndicated loan market, as well as their reluctance to take on the additional reporting requirements that a credit rating would necessitate.
The MAS has been more successful in attracting debut issuers to Singapore through its wider Asian Bond Grant, which covers the G3 market. This subsidizes issuance-related expenses, also subject to an S$400,000 cap, provided that the majority of the execution work is conducted in the city state and the bonds are listed on the SGX.
During 2017, this resulted in a tripling of issuance volumes to S$28 billion by debut borrowers. The roll call included maiden issuers such as Indonesia’s PT Paiton Energy.
During 2018, that figure almost certainly slipped given the 20% drop off in issuance volumes across the region’s G3 bond market.
But one of the most notable aspects of the Singapore dollar bond market is how resilient it has been in comparison.
There was a far more marginal 12.4% drop off in issuance from S$24.9 billion in 2017 to S$21.8 billion in 2018. And fundraising was actually up 11% from 2016's S$19.3 billion when the market was grappling with the high yield sector's travails.
Samuel Chan, head of capital markets, Singapore, at Standard Chartered, says that the Singapore dollar market is still liquid. “Issuance dropped off during the first half of 2018 because borrowers didn’t want to pay a new issue premium and turned back to the loan market instead,” he commented.
“But activity picked up again during the third quarter when we saw local and international banks come to Singapore to raise Additional Tier 1 funds,” he added. “That soaked up the excess liquidity pretty quickly, but we don’t foresee institutions withdrawing cash out of the system.”
Chan also said that since Singapore's interest rates should remain low, the market will continue to provide an attractive liquidity pool for issuers to tap into during 2019.
In many respects, the Singapore bond market seems to be in rude health following a painful rite of passage. Whether its distressed high yield credits return to haunt it remains to be seen.
DBS’s Clifford highlights how quickly the overall market appears to have re-calibrated. “The focus has switched from high yield to investment grade and from individuals back to institutions just as it has in the wider G3 market,” he concluded.
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