New framework needed for trading Singapore corporate bonds; A good example is the 25 per cent plunge experienced by Olam perpetuals when the company was mauled by short-seller Muddy Waters in November last year

New framework needed for trading corporate bonds

Wednesday, Dec 25, 2013

Goh Eng Yeow

The Straits Times

Retail investors frustrated by bank deposit rates and the flatish stock market are often tempted by bonds but anomalies around some Genting issues show that it can be a perplexing game. The casino operator issued two tranches of perpetuals – a bond-like instrument that offers a fixed payout but no shareholder rights – last year.One tranche worth $1.8 billion was sold to fund managers and subsequently traded in the over-the- counter (OTC) market via a network of dealers.

The other $500 million tranche was snapped up by retail investors about a month later and traded on the Singapore Exchange (SGX).

To the lay investor, the two tranches of bonds are identical for all intent and purposes, enjoying a 5.125 per cent coupon rate.

Yet, the institutional tranche of Genting perpetuals is languishing at $94.48 – or a 5.5 per cent discount to its $100 issue price – while the SGX-listed bonds are being traded at a 4.5 per cent premium to its $1 issue price at $1.045.

Now, you would think that it is a no-brainer to buy the institutional Genting perpetuals since they are effectively trading at a 10.6 per cent discount to their retail brethren.

But if you are a retail investor with limited cash resources, you may not enjoy the better pricing which the institutional Genting perpetuals command as you need at least $236,200 to buy just one lot of the stuff.

It is not wise to commit such a big sum to just one corporate bond. After all, investing in bonds – even those issued by top-notch companies – carries risks.

As the global financial crisis five years ago has shown, even the biggest and strongest firms are not immune to collapse.

A good example is the 25 per cent plunge experienced by Olam perpetuals when the company was mauled by short-seller Muddy Waters in November last year.

As one reader Vincent Choo observed, watching the running battle between Olam and Muddy Waters literally meant “life and death” to him as he had sunk a big chunk of his retirement savings into Olam perpetuals for institutional investors.

“Now, I am having sleepless nights, wondering whether to cut my loss at a fire sale or hang on and ignore all the noises,” he wrote in an e-mail during the price plunge late last year.

His predicament was understandable.

Leaving the money in the bank meant that he was paid almost zero interest, yet putting it to work in what was supposedly a safe investment offering a high yield like Olam perpetuals turned out to be a nightmare.

With a rapidly ageing population that is likely to live well past their 80s, there is a clamour for investments such as bonds that offer a steady stream of income.

This problem will only worsen since the United States Federal Reserve has flagged that US interest rates will stay low for a long time – a move that will also depress interest rates here.

For regulators, the dilemma is how to protect retail investors’ interest while allowing companies to directly tap the funds from them.

An SGX-listed firm is required to issue an abridged prospectus which runs into more than 100 pages if it wants to do a retail bond issue. Given the plentiful liquidity in the market, it would rather dispense with such a painful requirement and sell its bonds to institutions instead.

Ironically, that poses an even bigger risk for a retail investor as he has to cough up a huge sum to get a slice of the bond offering – a move that runs contrary to the prudent diversification approach advocated for investments.

However, there is an alternative worth pursuing: Three years ago, SGX chief executive Magnus Bocker suggested looking into ways to break up the lot size for institutional bonds once they are issued, in order to make them more affordable for trading to small investors.

Nothing further has been heard of the suggestion but it is an idea worth pursuing.

Take Italy, another market which has a rapidly ageing population that also has a big craving for fixed income assets. It offers a good example of what we can do to nurture our own retail bond market.

Borsa Italiana – the SGX’s Italian counterpart – has established a trading platform known as the multi-trading facilities (MTFs) which allow retail investors to trade corporate bonds that used to be confined to banks and fund managers in the OTC market.

Bonds traded on the MTFs are quoted at a percentage of the bond face value – typically set at 100. This effectively lowers the cash outlay for small investors.

To improve liquidity, Borsa Italiana also requires “market specialists” to provide continuous bids and offer quotes throughout the trading day to ensure that traders can get in and out of the bonds easily.

If the Italian example is anything to go by, launching MTFs here to trade institutional bonds is the way to allow yield-hungry retail investors to buy them in an affordable manner.

For too long, our small investors have been starved of choices for investing their nest eggs. Let us at least try to clear the regulatory hurdles to get bond trading off the ground.