The Singapore Bond Market Interview
9th May 2016
This post was written for www.hnworth.com, a site targeting high net worth individuals in Singapore.
Have fun reading !
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I was rather intrigued, and later tickled, when told of some interview questions meted out at certain MAS scholarships for the pursuit of higher finance degrees, struck by the irony that the would-be-financiers were posed the problems that the experts themselves cannot solve; to be burdened by national problems because school is not tough enough, and/or to temper any grandiose illusions of Wall Street in Singapore.
Rounding up a loose panel of friendly financial practitioners, who would all remain anonymous as Vet A/B/C, I posited the 2 questions to them for selfish posterity, personal understanding, industry/market bashing and, more importantly, for some future scholarship applicant to chance upon one day.
Question 1 : “How do we grow the Singapore bond market ?”
Vet A : “Oh, don’t they think it’s good enough as it is, with Singapore coming up as the world’s No. 3 financial centre thingey in the papers ?”
Eyes rolling ….
“We need more variety in the market, both investors and issuers. Over a decade ago, I would say the market was much more vibrant with a likes of Pacific Life, Cadbury’s, Ford’s, those asset backed securities such as Tincel (secured on Raffles City), inverse floater structures, VRN(variable rate note) programmes, amortising bonds and so on.
Now we are sitting in a polarized marketplace between junk that no one except private banking clients can touch, and the usual government linked and/or rated names that trade in a world of their own (ignoring their comparable offshore levels) and then we have all the real estate companies, Reits and banks which make up the rest of the market, offering very little in between for customers to choose from.”
Vet B peevishly interrupts.
“How about getting some ratings for our local companies ? I mean Singapore must have the largest pool of unrated mid to large cap companies in the developed world. That is a big setback for potential demand when they tap the local bond market.
The defiance starts at the top and a few of us may recall that Capitaland rejected the unsolicited BBB+ rating from S&P. Why ? Unsolicited is free but it would have made them lose face to the likes of Sun Hung Kai (A+) and Hongkong Land (A3/A).
Similarly for our second largest real estate firm, CDL, which prefers to stick to their tiny private placement strategy than to pay up for recognizable issues. Whose fault is that ?
We even had SGD 5Y bond futures then too!”
Vet A, continuing to dominate, “Well, we did have a flood of global investors back in 2008/9 when Singapore got included in the World Global Bond Index and rest which led to a wall of money coming into Singapore at the turn of the decade.
It looked all the more promising when MAS went on to allow banks to use rated corporate bonds for their minimum liquid assets, spurring a supranational bond issuance frenzy.
It all fell flat in time and I blame it MAS Notice Section 757 …”
Me : “Too technical for the youngsters ? How about just simplifying ? That MAS does not allow foreign borrowers to borrow in SGD dollars and thus must swap every cent of proceed into another currency, having to pay a hefty premium to do so, and making borrowing or issuing bonds in SGD dollars an unattractive option and even less appealing when the SGD dollar weakens.
But really, is that the real problem with Singapore ?”
Hmm my 2 cents worth, nothing compared to the above experts.
i thought the bigger problem is we dont have sufficient large caps in Singapore. The mid-small caps are way too small, and if you were to apply Moody’s methodology (available free online) on those names to get a shadow ratings, those corporates issuing retail bonds now (the usual suspects) would all be rated single B and below. The yields will all jump as a result, and it will not make economic sense for them to even issue at all. These companies either have crappy corporate structure (heavy structural subordination), super high leverage or from very cyclical industries. They are all being supported by their rich and famous promoters, or because their brand is featured prominently somewhere.
On the other hand, the institutional investors (major AM houses) typically have SGD mandates that require IG ratings. Hence, as you highlighted there is a clear polarised market where the AM houses chase the IG stuff, bidding the yields down to pathetic levels, while the PBs are left with the unrated (single-B or CCC equivalent) credits. Who knows, the promoters of these small-mid caps are buying their own bonds through the private banks.
At the end of the day, from the issuers’ point of view there is no reason to tap SGD bond market, unless it is cheaper or because they want to do a small size issue. A USD benchmark is typically USD300m, while the SGD benchmark has shrunk from SGD300m to the SGD100m now. From the investors’ point of view, there is no way we can find proper bond liquidity from a < SGD100m deal at 250k ticket size each. Not to mention, the bonds are mostly held by 1 certain private bank that deals with most of issuance, and refuse to make market when things turn sour. They have became the Market already.
Let's just hope nothing big blows up soon… but that maybe a sign that the SGD bond market is finally maturing.