Making it easier for retail investors to buy bonds

Small investors could get bonds on their menu
By Mok Fei Fei, The Straits Times, 2 Sep 2014

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.

Bonds are a form of borrowing by companies and governments for which bondholders are generally paid a steady interest rate or coupon. While they are generally seen as a safe investment with fixed, regular returns, not many are available for retail investors.

Often, $250,000 is needed just to get started, which means that usually, only sophisticated and wealthy investors tend to dabble in them.

This is set to change, as the Monetary Authority of Singapore (MAS) and the Singapore Exchange (SGX) seek public reaction to the new proposals.

Currently, only a handful of retail bonds are traded on SGX - like one issued by Singapore Airlines that offers a coupon rate of 2.15 per cent.

In seeking to broaden the choice, one key proposal is to offer existing bonds to retail investors after they have been listed on SGX for six months.

These so-called "seasoned bonds" could be redenominated into smaller lot sizes to be sold to smaller investors.

Subsequent offers of new bonds to retail investors, with the same terms as the seasoned bonds, would be exempted from prospectus requirements. This could help ease costs for companies issuing the bonds.

However, safeguards would still be in place to protect retail investors. For example, issuers would have to explain bond features and risks, and only "plain vanilla" bonds with a term of up to 10 years would be eligible.

Said MAS managing director Ravi Menon: "These proposals are part of MAS' overall efforts to improve retail access to simple investment products that give decent returns without too much risk."

Industry players have reacted positively to the proposals.

"Retail investors are not all gaining in stocks, and the fixed deposit interest rates they get can't even keep up with inflation," said Securities Investors Association (Singapore) president David Gerald.

Last month, the average fixed deposit rate among banks was 0.31 per cent for 12 months. Bonds generally pay higher returns although the price of a bond will fluctuate like that of a stock.

More options, but strict rules will limit number of issuers
By Mok Fei Fei, The Straits Times, 3 Sep 2014

LOCAL banks have said new proposals to make it easier to sell bonds to retail investors are welcome as there is pent-up demand for this investment option.

But the menu for the expected buffet of bonds could be limited, given the high benchmark being proposed for bond issuers.

On Monday, financial regulators, the Monetary Authority of Singapore and the Singapore Exchange (SGX), unveiled the proposals to make it easier for retail investors to buy bonds.

A key change would allow eligible firms eyeing retail clients to do away with the onerous need to issue prospectuses for basic bond offers.

Another proposed change is to allow bonds that have been traded for at least six months - so-called seasoned bonds - to be re-denominated into smaller board lot sizes of 1,000 or around $1,000 per lot.

Barriers to entry into the bond market would be significantly reduced for retail investors, who are mostly kept on the sidelines as bonds typically need a minimum investment of $250,000.

These moves pave the way for major players, such as investment firm Temasek Holdings, to issue retail bonds.

Its president, Mr Lee Theng Kiat, said in April that Temasek hopes to offer bonds to retail investors "when there is a suitable opportunity to do so".

Industry players said the changes would help to deepen the bond market and improve the liquidity of the asset class, adding there is pent-up demand for retail bonds.

DBS' head of fixed income, Mr Clifford Lee, said: "Retail investors have really been speaking out to try to get more... of such bonds, so we know there is demand on the ground for appropriate types of bonds from issuers.

"I think issuers will also welcome these proposed changes as these allow them to tap another investor base."

Mr Lee noted that present disclosure requirements and processes are fairly onerous for many issuers, resulting in the lack of retail bonds.

There are just 11 listed retail bonds and 22 Singapore Government bonds on the SGX.

Still, even with the proposed changes, retail bond offerings could be a rarity.

The tough eligibility criteria being proposed mean few entities, other than government agencies or blue-chip companies, will be able to sell to retail investors.

Retail bond issuers who want to sell seasoned bonds must have an investment credit rating of at least BBB and a market value of at least $1 billion. They must also have had a listed stock or bond for at least five years.

The seasoned debt issue must also have an initial minimum principal amount of $300 million.

Based on just the minimum $300 million criterion, only 17 of the 102 bonds issued this year as at Aug 25 would be able to hit the benchmark.

Issuers that can meet the eligibility criteria are often the bigger, more stable firms, which means they are safer bets for investors.

That, however, means the coupon they pay would not be high.

For example, the retail bonds traded on the SGX show CapitaMalls Asia and Singapore Airlines offering a coupon rate of 2.15 per cent, lower than the 2.5 per cent interest rate an investor can earn on his CPF Ordinary Account.

One retail bond offering significantly improved returns that beat inflation is from Olam, which has a coupon rate of 6.75 per cent, but is denominated in United States dollars and carries a currency conversion risk for investors here.

Another potential concern is that many bond issuers, especially the smaller ones, avoid the hassle of getting a credit rating.

OCBC head of capital markets Tan Kee Phong said the measures will nonetheless make it easier for issuers to tap liquidity in the retail space.

"Retail bond issues from quality issuers, while limited in number and offer size in the past, have generally attracted strong interest from investors who are keen on achieving stable yields.

"This would likely go some way towards incentivising them to consider retail issues as part of their capital-raising and management plans."

One retail investor with some doubts is 36-year-old finance manager Anna Goh. "I am concerned about the liquidity of retail bonds because I'm not sure if they can be easily bought or sold in the open market," she said.

SGX faces uphill challenge in trading bonds
It has to ensure that an investor can sell a bond as easily as he can buy it
By Goh Eng Yeow, The Straits Times, 4 Sep 2014

MAKING it easier for retail investors to buy bonds - as laudable as this objective may be - is not good enough by itself.

The big challenge facing financial regulators in Singapore is to nurture a vibrant trading market to ensure that an investor can sell a bond as easily as he can buy it.

This is one of the concerns raised by traders over new proposals by the Monetary Authority of Singapore and Singapore Exchange (SGX) to make it easier for retail investors to buy bonds - long out of their reach, given that it usually costs at least $250,000 just to buy one lot of bonds.

For the SGX, one big hurdle is to harmonise the bewildering array of practices which exist in the over-the-counter (OTC) market, operated informally by a network of banks, where bonds are now mostly traded.

Ms Jenny Chiam, SGX's head of securities, said: "In the stock market, any corporate action such as a dividend payout is reflected in the price. But in the OTC bond market, the accrued interest is reflected only in the settlement amount."

Hence, the SGX is still working out how to align the two practices to ensure that retail investors are not confused if they see different prices for the same bond in the OTC market and on SGX.

She said: "We are reviewing our practices. But as in any system, this will take time."

There is no uniformity in the fee structure on how banks charge their clients in trading bonds on the OTC market. Some banks incorporate the commission they charge their clients in the bond's bid and offer prices, while others charge an additional fee of 0.25 per cent or more over and above the bond's bid-offer spread.

There is also the concern that SGX's criteria on which issuer's bonds will be made available to retail investors may be too stringent - and that this will limit the number of issuers that qualify.

SGX proposes to allow bonds that have been traded for at least six months (so-called "seasoned" bonds) to be resized to smaller board-lot sizes of 1,000 from their original lot size of 200,000.

But the option to break up the lot size will be given only to issuers with an investment credit rating of at least "BBB" and a $1 billion market value. The seasoned bond issue must also have an issue size of at least $300 million.

Based on the minimum $300 million bond issue size, only 17 of the 102 bonds issued this year would be able to meet the requirements. But Ms Tng Kwee Lian, SGX's head of fixed income, said: "The reason why we start off with a $300 million cut-off is so that we do not have a market where it becomes difficult for retail investors to buy and sell because the issue size is too small."

If the minimum size were cut to, say, $100 million, the bonds may turn stale in investors' hands after they are seasoned, she said.

In the United States, the benchmark size for bonds, targeted at retail investors, is in the range of US$500 million to US$1 billion (S$625 million to S$1.25 billion).

To encourage issuers to take advantage of the "seasoning" framework, they are given the option to "retap" the market to raise funds for up to 50 per cent of the original bond size, without having to issue a prospectus.

Ms Tng said retail investors will be able to buy the bonds during the "retap" as these will be made available via ATMs and placements with brokerages, the two channels used to sell shares during initial public offerings.

As a gauge of retail investors' healthy appetite for bonds, Genting Singapore's $500 million perpetual bond's public offering attracted $731.3 million in subscription via ATMs in April 2012.

Lowering the bar for investors keen on bonds
Plan for smaller lot sizes of 'seasoned' bonds useful, but safeguards still needed
By Goh Eng Yeow, The Straits Times, 8 Sep 2014

SINGAPORE'S rapidly ageing population has resulted in a growing clamour for investments offering a safe and steady stream of income deep into old age.

Thanks to better health care, Singaporeans are now living well into their 80s and beyond.

But the dilemma for regulators has always been how to protect the interests of small investors while allowing companies to tap funds directly from them.

So, it is gratifying to note that the Monetary Authority of Singapore (MAS) and the Singapore Exchange (SGX) are finally tackling the problem head-on. Last week, they unveiled a series of proposals to make it easier for retail investors to buy bonds.

One key change is to let eligible firms - those graded "AA-" or higher by an international credit-rating agency such as Moody's or Fitch - do away with the need to issue prospectuses in order to do bond offerings for retail investors.

Another proposal is to allow some bonds, rated "BBB" or better, and which have been traded for at least six months, as they become "seasoned" - to use the industry lingo - to be broken up into smaller board lot sizes of 1,000, or about $1,000 a lot.

This is far more affordable for ordinary investors than their original lot price of $250,000, aimed at "sophisticated" investors such as pension funds.

To avoid disappointing retail investors eager to get a shot at buying the "seasoned" bonds, issuers can issue more of the bonds, as they are given the option to raise more funds for up to 50 per cent of the original bond size without having to put out a prospectus.

And to make sure that the bonds get to retail investors, these companies can revisit the market in this way only via ATMs and placements with brokerages - the two channels used to sell shares for initial public offerings.

At first glance, there seems to be little to quarrel with over the proposals, which provide a much needed and long overdue overhaul of the way bonds are sold to retail investors.

MAS is to be applauded for the emphasis it has placed on simplifying the disclosures an eligible corporate issuer has to make if it wants to revisit the market for funds.

Rather than requiring them to produce a lengthy document, the MAS is confining issuers to issuing a pamphlet, not exceeding eight pages, to flag the key features and risks of the bonds.

This is a contrast from the complicated prospectuses issued by IPO aspirants - sometimes heftier than the Yellow Pages - that can be a big turn-off for any investor who may want to read them.

But one concern voiced by traders is whether MAS has set the bar too high in its regulatory overhaul of the bond market, making it impossible for all but the highest-grade bonds to reach retail investors.

That means that the payout on such bonds may not be much higher than, say, the 2.35 per cent coupon which a 10-year Singapore Government bond enjoys.

True, bond investing is not without risks. An investor's bond holdings can go up in smoke if the company goes belly up. Bond investing is also likely to attract a more risk-averse breed of investors, such as the retiree looking for a safe and steady income stream or a family saving up for the children's college education.

But the tough eligibility criteria being proposed mean only government bodies such as the Housing Board and the bluest of the blue-chip firms such as banks will be able to get the green light.

Even then, their offerings are confined only to plain vanilla bonds even if they meet all of MAS' other stringent criteria. If they want to issue perpetual bonds or convertible bonds, the current rules, such as issuing a prospectus, still apply.

Would it be worthwhile to widen the proposed eligibility criteria?

Take, for example, OCBC Bank. When it tapped the market in 2008 for $1 billion by issuing preference shares that offered a 5.1 per cent coupon, it managed to attract more than $4 billion in subscription monies from retail investors in just 24 hours, even though the global financial crisis was then at its height.

Granted, preference shares are riskier than vanilla bonds. This is because unlike vanilla bonds, whose interest must be paid according to a fixed schedule, preference shares allow an issuer to defer or even forgo a coupon payment without defaulting on its debt obligations. The principal repayment is also left to the issuer's discretion.

But as seasoned investors have observed, lenders such as OCBC are proxies to the Singapore economy. It would be unthinkable for the bank to skip even one interest payment, as the consequences for the wider economy would be quite devastating.

Five years later, after making its regular coupon payments without a hitch, OCBC retired the debt and paid off holders of the preference shares.

In highlighting this example, one may well conclude that most retail investors are savvier than what they have been made out to be.

And given the "caveat emptor" or buyer beware regime that has been operating in the stock market for the past decade, they are probably adept at doing their sums and weighing the risks.

So, setting the bar too high will only be detrimental to nurturing a vibrant bond market for retail investors.

An important consideration is to provide safeguards to ensure that complicated derivatives products, such as the ill-fated Lehman Brothers Minibonds, do not make their way to the market and give investors the mistaken impression that they are bonds.

As it is, many retail investors hold out hope of buying bonds of the blue-chip firms in which they are already shareholders. Can buying bonds - other than the vanilla vintage proposed - be any riskier than the blue-chip shares which they hold?