Retail Bond Renaissance – Everyone A Winner
The hugely anticipated retail bonds are finally coming to Singapore’s market 3 years after a KPKB (hokkien slang) letter to the Straits Times forum requesting to bring retail bonds back into the market.
Kudos to the regulators for kicking straight into action with a consultation paper in September 2014, further refined in 2015 as MAS gave the greenlight in March that finally passed into the Securities and Futures Act on 19 May 2016 (http://www.mas.gov.sg/~/media/MAS/News%20and%20Publications/Consultation%20Papers/Response%20to%20Feedback%20Received%20%20Draft%20Legislation%20to%20Effect%20the%20Policy%20Proposals%20to%20Facilitate%20Bond%20Offerings%20to%20Retail%20Investors.pdf).
Singapore Savings Bonds, Retail Bonds and ETFs were the SG50 goodie bag announced by Senior Minster of State for Finance and Transport, Ms Josephine Teo, last March.
Back in 2013, this is what we said about retail bonds.
“In Reply To The Straits Times Forum On Retail Bonds
So if you ask me what I think of the letter in the Strait Times forum yesterday on the request to bring retail bonds back into the marketplace. The answer is pretty simple : Money No Enough.
Retail tranches do not usually amount to more than SGD 20-30 million for all the 10k’s.
Paper work would cost significantly more for the legal aspects of a retail issue. Time to lodge the paper work would also take 2-3 weeks more. Only the truly altruistic issuer would consider a retail bond but not before slashing the coupon rate to make economic sense – eg. SIA (2.15% 5Y in 2010) and Capitamall Asia (3.8% 10Y in 2012).
And do not forget the cannibalisation of business here. Why should a bank want to sell a retail bond for a pathetic fee or no fee when they can sell you a unit trust, insurance linked product, a shorter term enhanced deposit (so you have to keep rolling every few months for them to earn fees) and a host of other more profitable products ?” https://tradehaven.net/horrow-halloween-part-2-sgd-corporates-bonds-what-fund-managers-are-saying-and-a-bit-on-retail-bonds/
It has all been fixed, with the regulators taking no chances to ensure a smooth transition – reducing risks of cannibalisation and addressing the issue of costs.
- Retail bonds will exist to complement the wholesale tranches (a minimum 20% of the initial issue must be taken up by Accredited Investors or Institutions, excluding the bank(s) leading the deal). And re-taps cannot exceed 50% of the initial AI/II take-up size.
- The Ministry of Finance will grant a tax deduction of up to 2 times of related issuance costs to incentivise eligible issuers (who must obviously be Singapore tax paying companies).
The message is clear – there will be changes in the marketplace for the everyday investor, expanding their savings options to the world of bonds as the population steers towards a silver generation in the worst possible of times, when the global economy and markets are weighed down by negative interest rates.
What can we expect from it ? Noting the excitement of a few friends of mine, who are busy gearing up for the fresh blood to come into the playing field, let us first take a look at what we will be getting and give our comments.
Summary of the new retail bond rulings.
There are now 3 ways to access the retail market.
- The Old Way – like what we have seen in recent months from Hyflux (most recent), Oxley, Perennial Real Estate, Aspial and so on. For the issuer to do it via an IPO route – to lodge a prospectus and properly IPO a bond.
- The Exempt Bond Issuer Way – that allows eligible issuers that meet strict criteria to offer bonds directly to retail investors at the start of an offer without a prospectus, subject to other conditions.
- The Seasoning Framework Way – that allows wholesale bonds (min. denomination SGD200k) of eligible issuers to be re-offered into the retail market in smaller denominations after a 6 month seasoning period. Issuers can also choose to offer additional bonds on the same terms, subject to conditions.
Note that the onus is on the issuer (or the bank arranging the deal) to initiate the process.
- We should have a bunch of Singapore firms that qualify as exempt issuers. Pulling up the billion dollar companies in Singapore, we have 50 that can start right away. We highlight those who “fail” in yellow. [NOL and Oxley both fail the “credit test” while most of the others fail the “listing” test.]
- The Seasoning Framework is slightly more complicated but we can an additional 100 companies on the SGX that qualify although recent retail bond issuers, Aspial, Hyflux and Perennial somehow slipped the cut and much maligned names like Raffles Education, Guocoland and Oxley managed to qualify.
- These are all nothing compared to the flood of global names that would qualify if they would condescend to do a retail bond issue to list on the SGX when they mostly have no need for the double tax credits.
- Foreign investors are not precluded from retail bonds, noting the tax exempt status on interest income for offshore investors and most of all, there is no restriction on the currency of issuance which opens the ballpark for a lot more variety, if issuers are willing (Insha’allah).
In the past 12 months, we have seen 9 retail issues, some repeat issuers, who have tapped the retail market to some success using the Old Method, and getting away with less than what they would have had to pay in the wholesale market which is perhaps a tad exhausted on their names.