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More bonds a boon for investors

Recent changes will make more bond options available to retail investors. But investors still need to do their homework first.

The recent launch of two new bond frameworks means small investors can look forward to a wider range of plain vanilla retail bonds, up from the 11 on offer now.

For many years, retail investors in Singapore lamented that they did not have access to corporate bonds, especially when there are attractive regular interest payments or coupons on offer. While there are about 1,900 bonds issued by companies listed on the Singapore Exchange (SGX), they are available only in large denominations of at least $200,000 and most are offered only to institutional and accredited investors.

Corporate bonds that are to be distributed to retail investors have to be accompanied by a prospectus. Financial experts say issuers typically avoid producing a prospectus because of the potential criminal and civil liabilities for non-disclosure and/or misrepresentation and the resulting higher costs of producing such documents.

Only three retail bonds have been listed on the SGX this year, all with a four-year tenor: Oxley Holdings (coupon rate of 5.15 per cent a year); Perennial Real Estate (4.55 per cent); and Aspial Treasury (5.3 per cent). There were four such listings last year. These bonds met with a strong response.

The principal-guaranteed and risk-free Singapore Savings Bonds was also launched last year for the retail market but response has been lukewarm because its coupons are relatively lower.

Going forward, retail investors are likely to be spoilt for choice.

The SGX and Monetary Authority of Singapore (MAS) have said the steady increase in investor interest in debt securities such as corporate bonds led to the introduction of the two frameworks to better improve access to them.

TWO NEW BOND FRAMEWORKS

The two are the bond seasoning framework and the exempt bond issuer framework. These will allow investors to buy bonds in denominations as small as $1,000 on the SGX without requiring issuers to prepare a prospectus.

•Bond seasoning framework: This requires that only bonds that have been sold to institutional or accredited investors and listed on the SGX for at least six months - or seasoned - may then be sold to retail investors with just a product highlights sheet. This will mitigate the risk that comes with relaxing disclosure requirements such as doing away with the need for a prospectus, and providing retail access.

Accredited investors are those with net personal assets exceeding $2 million or whose income was not less than $300,000 in the preceding 12 months. Corporations with more than $10 million in net assets can also be classified as accredited investors.

Minimum hurdles on the issuer's size, listing history and creditworthiness must also be crossed.

"Re-taps" are allowed. This is when an issuer makes subsequent direct offers of bonds to retail investors under the same terms as the existing wholesale bonds without a prospectus once the six-month seasoning period has ended.

•Exempt bond issuer framework: Under this, issuers can offer bonds directly to retail investors at the outset without a prospectus if they meet eligibility criteria that are stricter than those in the seasoning framework.

The moves by the MAS and SGX with regard to the frame- works encourage companies to tap the retail market.

The new seasoning framework reduces the regulatory burden on companies. By simplifying the documentation, time and cost as well as reducing the exposure to potential liabilities, the MAS and SGX have made the issuance of new retail bonds more attractive to companies.

MORE CHOICES, BUT BEWARE THE RISKS

While more choice for retail investors is beneficial, it remains to be seen if companies will take to issuing bonds on a regular basis.

Ms Tan Lay Hoon, CFA board member and co-chair of advocacy at CFA Singapore, points out that the primary considerations for issuers tapping the retail market would be liability, cost and access to liquidity. Would extending the offer to the public result in lower net borrowing cost or increase the amount raised?

Based on the revised eligibility criteria, there are about 120 issuers who could tap the seasoning framework. About half of these are potential exempt bond issuers.

OCBC Bank credit analyst Andrew Wong says the new framework will reduce blue-chip firms' administrative burden for retail issues.

A Singtel spokesman says the new framework makes it easier for corporate issuers with strong track records to tap the retail bond market and benefit from a bigger, diversified pool of investors.

One potential issuer that retail investors will look out for is Temasek Holdings, which previously said it is looking at offering retail bonds.

OCBC's Mr Wong adds that the new regime will improve market liquidity by introducing a larger pool of retail investors who can invest in bonds previously available only to big investors.

Certainly, for retail investors, the move will be a chance to diversify their portfolio and reduce the overall risk of their investments.

Traditionally, bonds are generally perceived as less risky than equities. Bonds are an asset class offering investors an opportunity to diversify their investments and earn a better yield than bank deposit rates, which are currently close to record lows.

With a range of potential returns from 2 to 5 per cent, bonds give a higher yield than bank deposits and money market funds and provide regular fixed interest income.

As they are considered a relatively safe and low-risk instrument, bonds can help bring stability to an investor's portfolio. Generally, the proportion of bonds in a portfolio is dependent on the investor's risk profile. The lower the risk appetite, the higher the percentage of bonds in the portfolio and vice versa.

On the plus side, if a company becomes insolvent, bonds rank ahead of equities in terms of repayment priority.

This is why retirees often hold a higher percentage of bonds in their portfolios.

At the same time, investors should note that bonds are not risk-free; not all are created equal and some are riskier than others.

Retail investors should be aware that bonds may not keep pace with inflation and the company could also default, which would mean that the bonds could be worthless.

Retail investors should make use of this opportunity to upgrade their know-how on the different types of bonds and their risk levels.

For example, instruments such as perpetual capital securities (like the recently issued Hyflux retail perpetual capital securities) and perpetual preference shares do not qualify under the new frameworks as they are deemed to be riskier.

As in most things in life, having more options is good when you know what to do with them. So, investors, understand your financial objectives, do your homework and make an informed choice.

A version of this article appeared in the print edition of The Straits Times on June 09, 2016, with the headline 'More bonds a boon for investors'. Print Edition | Subscribe