An Honest Opinion On HDB Bonds

Honesty does not create profits. And therefore, this is probably the only piece you will come across on the web with an unbiased opinion on HDB bonds that offers a few suggestions on how HDB can share their largesse with the rest of the Singaporean population.

Before I begin, the all important disclaimer. I do not seek to undermine HDB’s decision making process or to criticise their current scheme of fund raising. The sole undertaking of this op-ed is to a constructive end in its views and suggestions.

There are over 60 statutory boards in Singapore, excluding the partially corporatised JTC, PSA and PUB, all 3 former big issuers in the SGD market.

HDB is the only one left that is actively issuing bonds and they went on a spree last year, issuing a record breaking SGD 6.17 bio worth of papers to replace SGD 800 mio of maturing debt. They have SGD 650 mio due this year and have been heard to be asking for a 15 year bond as I type.

The market knows that they are not the issuer they used to be and have lost a great deal of bargaining power they used to wield. In the past, HDB was a prime target but now when the banks receives a Request for Proposal, they do the wise thing and call each other up. From healthy consortiums of 2-4 banks per bid, now all HDB gets is one big fat group bid and its no wonder now HDB bonds could be one of the most profitable trades for banks in Singapore in 2013. Do not ask me if this is anti competition because I am not an expert on such matters and do not ask me to verify  my story because I cannot.

How times have changed from the days when I had to squeeze every single cent out of each new issue and subsidise the cost of hedging just to win the deals then.

Some of us may remember we used to be able to buy HDB bonds during their tender, over the ATMs for a minimum denomination of SGD 10,000. Secondary buyers had access to the retail bonds on the stock exchange. That during the period of 1999 to 2001 and the very last retail HDB issue matured in Sep 2009. There was a hiatus between 2001 and 2004, when HDB started issuing again with a proper MTN programme and every single tranche since has been an institutional tranche.

The justification was simple then. Retail tranches do not make up a decent enough proportion of each issue for the banks and HDB to labour through the process of listing the bonds on the stock market and the cost of ATM subscription was high – I suspect because it was labour intensive work as the automation was only on the front end that we see, the rest was still pretty hands on.

Back to the present.

HDB accounts are public but I am unable to get a breakdown of the fees they are paying to the “group” of banks for the bonds they issued last year. I am assuming they are paying fees now because they are paying much higher coupons as well which suggests a “hard sell” for them. So let’s suppose they are paying 0.5%. That would work out to be SGD 30 mio (on SGD 6.17 bio issued last year).

The way I would imagine it would work is like this. The banks submit only 1 group bid for the HDB bonds even though it is a competitive tender amongst a good dozen banks, the coupon is fixed and the fees are deducted off the notional amount the banks finally pass on to HDB.

HDB bonds are not finding much favour amongst the institutional investors for the following reasons.
1. HDB is not a rated entity
2. HDB accounts show that they are running at a loss
3. HDB is not explicitly guaranteed by the Government of Singapore
4. HDB supply has grown many folds as stat boards are encouraged to fund themselves

As such, NUS (not a stat board but a company limited by guarantee from its Board of Trustees) and MRT are trading much tighter than HDB for all a statutory board is worth.

My suggestions are, hopefully, not regressive.

1. Perhaps we can revisit HDB retail bonds again even if the amounts are not going to be able to match the billions they like to raise these days (I am proposing SGD 50 million set aside for retail subscription). Yet if HDB is already paying exorbitant fees to issue, there is no harm in including the public in the clientele.
2. Perhaps HDB bonds can be issued to the CPF to enhance returns to CPF members instead of obliging the Ministry of Finance to issue the special bonds to pay the Ordinary account interest rates. I am unsure about how it is going to work because the CPF board is a stat board too.
3. Perhaps HDB can turn to other instruments that the public can economically benefit from, like short term notes and bills as a high grade substitute for fixed deposits.
4. Perhap we can revisit the old idea of having an umbrella Special Purpose Vehicle (discussed before) for stat board funding that has a credit rating and is government guaranteed ?

Why am I saying this ?

Because Temasek is issuing retail bonds too, something HDB pioneered over a decade ago.

And more importantly, every cent saved by HDB will only do Singaporeans good or ….. every cent paid by HDB should do as much good for Singaporeans as it can ?

And finally, this 15Y HDB is looking to be at least 3.5% which is an agreeable number for many Singaporeans and their CPF.

Just some wild thoughts from an imagination running wild. Please don’t sue me.