More options, but strict rules will limit number of bond issuers


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.