Economic Affairs

Credit crunch tests retail bond market in Singapore

Recent defaults have cost some investors their savings, so more safeguards are needed to forestall crisis of trust

When regulators finalised steps to open up Singapore's bond market to retail investors in May, they probably had not foreseen that within months, some of the riskiest debt issuers from years gone by would flip belly up without warning, taking hundreds of investors' savings with them.

Now the hunt for yield has ended in spectacular losses for those who lent to the likes of Swiber, Rickmers Maritime, Perisai Petroleum and Swissco as recently as 2014, and the genuine bewilderment on the part of some of these classified "accredited investors" raises the urgent question of whether investors here (and in some cases their bank relationship managers) have a fair enough understanding of the risks of junk bond investing.

At meetings where affected bond holders congregate to commiserate and discuss what little chance of recovery they have, some of the savvier ones have been surprised to meet a variety of characters who don't quite fit the script.

Take for example the 68-year-old retired civil servant and stroke patient who lost half a million dollars on two ill-fated junk issues and swears never to buy bonds for the rest of his life.

Or the Chinese-educated real estate agent who visited a DBS Treasures branch two years ago to collect red packets for the new year, and hesitantly shelled out $250,000 on Perisai bonds after a salesman persuaded her to do so. His sales pitch? He told her his own father had bought bonds in a similar company, that no one kept their entire savings in cash and that she could always sell the bonds if she chose to later.

In both cases, inexperienced private banking clients were sold unrated junk because they were deemed to be "accredited investors". That is, sophisticated enough to look after their own financial interests because their personal assets exceed $2 million or they earn at least $300,000 a year.


While these investors were not always investing novices, they were hardly fixed-income gurus either. At the low end of the private banking spectrum, just $350,000 in investable wealth would qualify one to be a member of the club.

Singdollar-denominated bond issues raised about $13 billion in the first half of this year, of which 21.3 per cent went to high-yield corporate bonds, or bonds with coupon rates above 4.5 per cent at issuance, according to OCBC's definition.

No doubt, the demand for these high-yield bonds, or junk bonds, came from investors searching for yield in this era of ultra-low interest rates, but the experience of these private banking clients raises concerns whether stronger regulatory oversight is required.

Though the financial services sector is already well regulated, banks can take steps towards better information disclosures and client education to address these problems and grow investor depth in the long run.

Lately, banks here have fallen under scrutiny for allowing their private banking arms to earn undisclosed bonuses of up to 1 per cent for selling their clients the riskiest debt, in addition to what the issuer already pays their origination and syndication arms in fees.

While such rebates are rife in Singapore, China and Hong Kong, where private banks have a larger presence, rebates are found in a much smaller portion of high-yield bond issues in the United States, Europe and Japan.


Banks here have other ways of squeezing higher profit margins out of the most plain-vanilla products.

At DBS, for example, some clients were offered a loan-to-value (LV) ratio of up to 70 per cent for some bond issues, including the Swiber 6.25 per cent notes issued in 2014.

This means they can buy $1 million bonds with just $300,000 in cash and still make a decent yield of about 5 per cent of the borrowed amount, given an interest rate of about 1.5 per cent.

The leverage used also counts towards the rebate or cash commission pocketed by the private bank from the transaction. For this particular issue, a 0.5 per cent rebate would have worked out to $5,000 earned on a $1 million transaction.

Bond traders have also flagged that undisclosed rebates can artificially inflate the price of an issue, with supposedly "oversubscribed" bonds being priced below par by the rebate amount the moment they are listed in the secondary markets.

Another risk that is often not fully represented to retail bond investors here is liquidity risk in the secondary market. Because bonds are traded over the counter rather than, like stocks, on an exchange, pricing is not transparent, and bankers themselves say it is unrealistic to expect trading to be constantly active.

Bond traders are under no obligation to work harder to make a market for bonds originated by their banks, and many investors have reported that it is far easier to buy a bond in the secondary market than to sell one, even if they are willing to sell at a loss. Even back in late 2014, many were unable to offload the bonds of troubled oil services firms maturing this year and the next.

Ironically, the lack of trading activity for bonds can sometimes give junk bond holders a false sense of security when their monthly banking statements come in and the value of their bonds is reported at "market value" - that is, an opaque number derived from independent sources, and which may be significantly higher than actual trading prices (if any).

So even in a dislocated market where liquidity has dried up and no new trades are registered, it is possible for a distressed bond to reflect a "market value" little changed from a month ago. And a risk-averse investor who would not otherwise part with $250,000 for volatile shares in a listed company thinks less before buying into a $250,000 bond in the same company.


If Singapore's banks seek to build a strong debt market ecosystem, they must help mend, rather than widen, the gaps in investor education. The number of investors burnt by defaults now is not a large one, but the fallout may hurt market confidence.

Trust has always been the currency of the economy, even more so as public hostility towards financial institutions has become something of an international trend.

Given how sizeable their private banking platforms are to their book-building, and how emotional this consumer segment can be compared to the institutional investor, it would be in the banks' interests to help clients make better-informed financial decisions.

The good news is that they seem to be getting the message.

From Oct 1, DBS has started disclosing the private bank rebates it earns from issuers in the bond IPO e-mails circulated to clients. When contacted, DBS also said that clients are made to validate their "accredited investor" status on an annual basis, and changes to a client's risk profile are properly assessed and recorded.

The welcome move comes even as the Monetary Authority of Singapore is also working with the private banking industry to strengthen the competencies of relationship managers.

And from next year, the definition of "accredited investors" will be tightened so that a person must choose to opt in to that status before gaining access to riskier products. At the same time, those already classified as "accredited investors" will be informed by their banks of their right to opt out of the status.

As the regime strengthens, investors too should be mindful that the blame game gets harder as safeguards are stepped up.

They will have to do more homework before making their next bond investment - by considering the financial health of each issuer instead of judging by name recognition alone, and discerning whether the loan is secured or unsecured, which will determine the recovery rate in the event of liquidation.

A version of this article appeared in the print edition of The Straits Times on October 19, 2016, with the headline 'Credit crunch tests retail bond market in S'pore'. Print Edition | Subscribe