Make corporate bond sales open and fair

Lately, there have been a number of corporate bond sales, with a few issues oversubscribed.

Normally, the bank that is handling the sales for the issuers will inform its clients in the morning and the applications close at about 3pm.

For corporate bonds issued by a renowned company, the bank clients will have to apply for more lots in order to have a chance of getting just one lot.

As the application progresses in the day, the book runner will know the size of applications and clients are expected to put in more lots.

This artificially bumps up the subscription size, creating a bubble, as cash is paid only upon successful allocation.

For instance, the StarHub bond issued recently had an order book of $1.7 billion for a deal size of $200 million.

The bank had advised me to put in five lots, with each of them costing $250,000. Even then, I was not allocated any. The bank told me the minimum number of lots clients have to put in was eight.

The whole process is not open and transparent. It would have been fairer if the bank follows the same allocation process as a share initial public offering (IPO).

In a share IPO, those who apply must have the cash in their banks. Allocation is based on the number of lots applied for and in a certain ratio.

In this way, clients who are given the allotment will be able to honour the payments.

With the current bond allocation, there is a risk of an applicant getting stuck with a few lots if there is a last-minute pullout from bond applicants.

Goh Geok Huat

A version of this article appeared in the print edition of The Straits Times on June 13, 2017, with the headline 'Make corporate bond sales open and fair'. Print Edition | Subscribe