Bond Revolution In Singapore – Lesson 7 : The SGD Corporate Bond Market
I will try hard to keep sardonicism to a minimal here and withhold all sarcasm completely for a simple, matter of fact write up.
That retail bonds are but a small subset of this growing market is why it is important to complete the picture of the SGD bond story.
The market has evolved tremendously since the early years of the 90′s when issues were less standardized and haphazardly placed. Playing a major role in market development has been the Monetary Authority of Singapore which worked zealously to market Singapore abroad to issuers and boosted the SGS marketplace to place Singapore as a major capital markets centre of the world.
It was easy to skip Singapore then in 1998 when MAS allowed foreign companies to issue in SGD. Most issuers have no need for SGD as the main currency for commerce is the USD. Besides, the non internationalization policy of Singapore did not allow foreign issuers to borrow or rather, raise money, in SGD unless it was for the purpose of investing in a local asset. Thus every single cent had to be swapped back into USD which could be costly.
Lets conclude that MAS’s perseverance paid off and these days, Singapore is a capital market centre to be reckoned with. Yet it has also resulted in a lop sided marketplace, lacking depth and issuance diversity and this is as far as I would go.
Few people would remember the ACMA bonds, Cycle & Carriage FRNs, Pidemco Land Inverse Floaters and Chenab secured on NOL Building, for instance.
These days the choices are pretty straightforward. >95% fixed rate issues divided into the following categories.
- Statutory Boards – established individually in Parliament, separate from the Government, without explicit government guarantee. Stat boards form the bulk of the outstanding market for corporate bonds.
- The main stat board issuers are HDB, PUB, LTA and JTC. These are not to be confused with their subsidiaries who also tap the market from time to time such as Ascendas which launched a perpetual this year but go under the same Bloomberg ticker as JTC.
- Domestic Issuers – local companies that most of the public would be familiar with. These can be divided into Temasek linked companies (TLC) which some still refer to as Government linked companies (GLC) and the rest of the market, which is dominated by local banks and real estate companies or REITS.
- Note that names such as SMRT and Singapore Post have been associated with government links although they are public listed.
- Offshore issuers – foreign companies and supra nationals are usually rated (Moodys, S&P or Fitch) entities, to make up for their lack of local exposure.
- These issuers have taken off as market familiarity increases and most of these issues are off an MTN programme (see below for details).
- Special Purpose Vehicles (SPVs) issuers – issued off structured note programmes that are not available to the general public. These could include some form of principal protection for the note holder and are structured to meet specific investment needs.
- Structured notes make up a good portion of the corporate bond market but are hardly traded and usually held to maturity, given the lack of a secondary market.
Types of Bonds – Fixed Rate or Floating Rate
- Senior – ranking pari passu with creditors in case of a default.
- Subordinated – junior to the senior bondholder.
- Perpetuals – ranking under subordinated holders but above equity holders.
- Hybrids – eg. senior perpetuals which are ranked along with senior holders only in times of a default.
- Convertibles – mostly senior papers that rank along with senior bondholders.
- Secured – ranking above senior bondholders in terms of rights over specified asset.
MTN – Medium Term Note Program
The MTN programme is a standardized way of issuance. Issuers can tap off this programme to issue bonds through the panel of banks approved. This saves time and costs as opposed to lodging documents for standalone bond issues.
MTN programmes are usually good for senior papers issued on a regular basis.
Where Do You Find These SGD Wholesale Bonds To Buy ?
Most banks have an inventory of papers for sale, depending on who you bank with.
Most corporate bonds issued in Singapore are listed on the SGX and cleared locally. USD papers may also list on the SGX.
A common confusion is that prices will be available upon listing which is untrue as most bonds are traded OTC which means that the SGX will not be able to provide price details.
New issues are not usually advertised to the public by law, specifically the Securities and Futures Act, which prohibits publicizing new issues unless a detailed prospectus is lodged along with other documentations.
It does not prevent a prospective buyer from buying the bonds if they qualify as an accredited investor. Notwithstanding that the bond may not be available to your regular bank, a quick call to your banker will easily sort that out.
A Little Industry Secret
My main gripe about new issues is the allocation process. You never seem to get the bonds you want and will get lumped for bonds you are not particularly interested in.
The bond allocation process is a thickly veiled procedure of apportioning papers to investors, done behind closed doors in a heavy shroud of secrecy with a great deal of hard ball bargaining between sales people and origination managers within the bank and between banks, if there are more than 1 involved.
There is no mathematics involved because favoritism cannot be quantified which makes it a good laugh or sob, depending on how you view it.
Selling Corporate Bonds
Now this can get tricky.
The participation of the retail sector is increasing. I would assume that accredited investors would be aware that buying a bond OTC does not carry a guarantee that the bond could be sold back OTC.
It is not my intention to cause alarm here, for I am quite certain that HDB bonds would have no trouble finding bids with many banks for retail amounts up to several millions or even hundreds of millions.
Liquidity for sub debts, perpetuals and high yielding papers could pose a problem during a crunch. Banks do not typically bid for their own perpetuals and subs as a rule to note.
If the bonds are custodised with the CDP, it is possible to sell through another bank, provided, of course, you have a banking relationship with them.
Choosing A Bond
I note with a faint irony that, generally, retail investor interest in corporate bonds tend to sway in favor of yields and name familiarity. The preferred method of evaluation veers towards comparison of yields with dividends and the base CPF rate of 2.5%.
Mentioned in Chapter 5 was how you could have made more capital gains buying the 30Y SGS this year.
It is thus apt that I end off here and prepare for the next chapter, the Big One, on bond trading, investing or whatever you may want to call it.