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”. http://www.mas.gov.sg/~/media/MAS/News%20and%20Publications/Consultation%20Papers/2014_07_21_final%20Enhance%20reg%20safeguards%20for%20investors.pdf
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.
http://www.straitstimes.com/news/business/markets/story/retail-investors-singapore-will-find-it-easier-buy-bonds-mas-and-sgx-unv?page=8
Reading through the consultation paper, many questions come to mind which will undoubtedly be addressed through the feedback loop.
Link to SGX white paper : http://www.sgx.com/wps/wcm/connect/sgx_en/home/regulation_v2/consultations_and_publications/PC/Consultation-Paper-on-Initiatives-to-Improve-Retail-Access-to-Debt-Securities
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. http://www.mas.gov.sg/~/media/MAS/News%20and%20Publications/Consultation%20Papers/Consultation%20Paper%20on%20Facilitating%20Bond%20Offerings%20to%20Retail%20Investors.pdf
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.
Issue criteria is so strict, I am not sure if it’ll be enough to draw sufficient buyers from bank deposits! For the issuers like Capland, why should they bother to go the extra mile to maintain rating and (extra chores/admin work) just to satisfy the retail market when their already low yield issues are being gobbled up as it is. Nonetheless, certainly a diversification option for retail investors.
If you read the white paper carefully, it has already provisioned for Capitaland to qualify.
No need rating as long as it passes the other criteria of the credit test.
Like I said, this will tie in nicely with the accredited investor “opt in” plans because once that comes into place, there will potentially be less accredited investors to buy the bonds in the primary.
Interesting stuff. As a retail investor, my main gripe is the bid-offer spread so hopefully this will tighten when it is list on the exchange.
Presumably the lot size will remain the same at $250,000 par? Wonder if the broking houses will drop comms for that kind of transaction value.
Nope. The lot size drops down to SGX bite sizes so the 250k will be broken up to the min. denomination.
Not sure if it will tighten the spread or not but it will certainly increase transparency and promote awareness.
There was a newly issued bond on tue, China Taiping insurance. Whats your view on this issue? Thanks.
Btw, when I try to write on your forum, it shows that i need to log in, which i cant find it.
Km
Yes. You are talking about the China Taiping Perp issued on 2 Sep rated BBB- and callable 09/2019 ?
Doing well now trading at 100.90/101.00 5.24/5.22%. It is a decent paper imo, mostly on PB demand. The coupon is tad too low for my comfort and the call feature at 100 after 5 years actually puts the bond as a 10 year risk.
The forum should be working. I guess its the same login as the website.
Try and login at under profile.
You should respond so that the market will be fairer and transparent for all. It will benefit everyone, not just some small group of people at the top at the expense of the population.
Why bonds need to be ‘seasoned’ by others to be flipped at higher prices? This is a scam. If they do that, we’ll sack them. Like you said, it can be issued fresh.
Recall some claiming that selling in smaller lots on the exchange makes it more expensive? Another crap.
Better be careful. This is a warning.
Another thing, the prices quoted are way too high. What are market makers doing? This is why it is illiquid. Trying to cheat all the time.
Election is coming.
Haha.
It is not just Singapore. It is worse in other places although they are doing more about it. The TRACE system for the US and even Malaysia has this !!! http://www.bpam.com.my/
It is most likely that the bonds will be higher in price when it hits the retail market because 1. wholesale should be cheaper and 2. investors will not be tempted to sell for a loss.
And if bonds are issued as retail bonds, the likelihood of a lower coupon is higher because of the costs and work involved.
Smaller lots have same processing costs so it will be more expensive.
Prices quoted not high but WIDE. Impossible to buy or sell anything if you ask me. Look at the government bond prices on the SGX ! It is a waste of people’s time but of course makes us look good as a financial centre.
Btw, it is possible to find some SGD bonds on Frankfurt Exchange etc. eg. ABN 4.7% 10/2022, Bonds that are not cleared by SGX. Needless to say, the prices are much tighter. I will not venture to suggest any reasons for that being patriotic and all.
Costs are definitely lower as it would be using an existing automated system shared by millions.
Personal services are always more expensive and being paid for by one individual.
When market-makers are the same ones issuing them. There is full control. Which do they sell – direct or indirect? How to have a proper market?
Sure market can’t grow.
“The only thing necessary for the triumph of evil is for good men to do nothing. ” Edmund Burke
…. bad men compass their ends.
I guess, to be fair, if there is a loophole in the system then it stands to be exploited until market forces correct it.
But it does not matter, because
“No matter what they do for their compliance, no matter what the regulators do and the increased burdens of recent legislation, you have a situation where compensation is typically based around performance and performance is measured by marks to market or yearly returns. That creates incentives for traders and structurers and sales people to push the envelope. And I have every expectation that, just as they always have, they will continue to do it.”, quote Philippe Selendy.
http://www.ft.com/cms/s/0/e9d3aa12-2e3f-11e4-b760-00144feabdc0.html#ixzz3DGA806TG
Back to the costs, it is a tricky one especially when you mix OTC with SGX. The reason why the SGS bid-offer on the exchange is so wide is mainly because the market makers are factoring in the processing cost for small lot sizes compared to wholesale amounts transacted.
It is automated on the surface but the processing is still same behind the scenes I think.
Why higher price? Due to flipping.
Buy at issue 1.00 6% for 2 yr
After 6 months, get coupon 3%
Sell at 1.04, earn immediate 4%
Total earnings 7% in 6 months
Retail buyer buy at 1.04
immediate loss 4%
6 months later, get 9%
Net gain 9-4% = 5% in 18 months plus all the risks
If maturity/redeemed earlier, net loss results
If longer, bigger gain for AI buyer.
It is not true this happens in other countries.
It only happens in Msia and US where these people are.
Flipping has become a basic assumption in the 6 years of QE when markets are bullish both bonds and credits.
But retail buyers are less sensitive to these than accredited investors.
That is a risk I note in the past when I observed certain retail bonds driven to -ve yields because the retail buyer is unaware of call dates etc.
Not sure if you seen this
http://blogs.reuters.com/muniland/2013/05/09/australia-helps-retail-investors-buy-government-bonds/
There is another research article on the US bond issuing market by a Indian guy claiming that it is cheaper to ‘season’ the issue first. Then also claiming incomplete analysis as costs could be due to audit fees, etc. So the scam goes.
Many countries have launched it and it was recently done too through the ATM. This is possibly the easiest way of doing it.
There are calculators and it can be seen by all. No need super trading for such investment products.
US can buy direct but sell slightly OTC with discounts.
Oz don’t even need OTC, just duplicate another SESDAQ.
Spreads are a demand-supply issue. Not premium due to transaction costs.
Whatever gives you the impression retail is less sensitive to flipping?
Rules are made by man.
We will see the best system wins.
You are right.
There is a slight misunderstanding on the “flipping” issue.
Retail bond prices are usually much wider.
Thus a bond that trades 100/100.20 may quote 100/101 in the retail market which makes it harder to flip.
The wholesale market is more sensitive to interest rate changes and all the 0.01% moves make a bigger difference to them and thus selling a bond at 100.20 from their cost of 100 (which is my idea of flipping) is more common especially when larger sums are involved.
Yes. The market is getting more transparent by the day with the US and developed countries leading the way. The Singapore local bank network is also enabled for bond “ipos” and we can subscribe to the monthly auctions via our ATMs.