Bond Market Development – SGD Retail Bonds, At Last (Updated)

Here goes… the proposal for seasoning retail bonds is out, timed perfectly with the “opt in” accredited investor scheme that is being formulated right now, that is most likely to be passed by next year.

It has been proposed that with the new accredited investor scheme,  everyone is automatically “opted out” with the option to “opt in”.

That would immediately preclude investors from buying wholesale bonds even if the measures are intended to safeguard against derivatives and some collective investment schemes.

For years, we have all known that it does not make sense because bonds are theoretically safer than stocks, although it depends on the company issuing them and the blanket ruling probably does more harm than good as investors will be given to speculative activities for the lack of investment choices because unit trusts are just too in-transparent and heavy loaded with charges for some astute investors to consider.

Today’s announcement can be lauded as great news for the retail folk out there.

Sept. 2 (Straits Times) — The man in the street could soon be offered another avenue to grow his money: Investing in bonds.
Proposed changes include making bonds more accessible to the average investor by offering them in smaller lots.

Reading through the consultation paper, many questions come to mind which will undoubtedly be addressed through the feedback loop.

Link to SGX white paper :

The gist : Retail investors will be able to buy wholesale bonds on the retail market via the stock exchange once the issues are “seasoned” i.e. 6 months after issuance, subject to the bond issue passing certain criteria.

There are 3 criteria to be addressed for our feedback.

1. Size Test
Market Cap S$ 1 bio for 6 months prior OR
NAV S$ 500 mio in latest fin statement and on average for 3 years

2. Listing Test
Has been listed for 5 years OR
Has listed securities or guaranteed securities on SGX for 5 years

3. Credit Test
No net loss for 5 years,
Credit rating of BBB or securities to be listed has rating of BBB by international rating agency OR
Has listed or guaranteed a listing of securities in SGX of S$ 750 mio or equiv. over 5 years

Issue Criteria
1. Not more than 10 years.
2. Full principal repayment at maturity.
3. Undeferrable coupon payments.
4. Coupon bearing with fixed or floating with a spread that cannot be changed. (no zero coupons ??)
5. Not convertible.
6. Not asset backed.
7. Unsubordinated. 8. Min. Issue Size S$ 300 mio.
9. Retap capped at 50% of initial issue size.
10. Retap via ATMs.

Framework does not apply retrospectively to securities issued before the future implementation of new rules. Thus every single bond in the market now does not qualify to be “seasoned”.

And MAS is exploring a “prospectus exemption” for eligible bond issuers in another consultation paper.

My first thoughts ?

My heart bleeds for HDB ! They do not qualify ! being unrated and not listed. Where is the justice in this ? Do note, however, there is nothing to stop them from issuing a proper retail bond instead waiting for their wholesale issue to be “seasoned”.

All the government linked companies (Capitaland, Keppel Corp, NOL, Semcorp etc) do not qualify – unrated, nor does A-Reit (rated A3) because they never listed 750 mio or more. Mapletree fails (unrated) and Mapletree Log fails (insufficient issuance). GLP is borderline because of its rating Baa2 and BBB-.

Ok, my first thoughts above were all wrong.

It seems that HDB passes the test because they do not have to be listed or rated, just as long as they have issued or guaranteed bonds worth S$ 750 mio on the SGX.

It is the same for Capitaland, Keppel, Sembcorp etc.
NOL is tricky because it is loss making and I got into an argument with a friend on the wording, if loss making is an overriding criteria.

And does it include subsidiaries ?

No perps, no sub debts, no Tampines Mall or JEM mall, and thank heavens, no Oxley, no Swiber and no Aspial.

SWIBER QUALIFIES if they manage to pull a 300 mio issue in the future !! Because if you add up all their issues in the past 5 years, we have close a 1 bio !

Special purpose financing vehicles will have to be, hopefully, explicitly guaranteed by the parent which is a consolation.

This is a positive for the retailer and ties in nicely with the investor protection initiatives as well as the retirement planning crusade brought up in the National Rally speech.

Retail turnover sucks and I do not see banks fretting too much over this proposal. Besides, its their bond leverage business that is paying the bills.

It will probably result in a small loss of revenue for some banks as they lose out some business, on margins and possibly small deposits defecting to retail bonds. There is also the issue of custody of the bonds but I am guessing that will remain status quo as buyers can choose to custodise with their respective brokers and banks.

Brokers can cheer in anticipation of higher turnover or perhaps not because bonds are long term investments and we shall not expect volumes to “churn” as much as some stocks do.

Local banks stand to gain as they are the only ones with the ATM network for IPOs.

I have a good mind to respond to the consultation paper over the criteria issues but that’s not my day job anymore so let me just sit back and relax and keep writing.