DBS is the leading bookrunner for companies which defaulted on Singdollar bonds

According to a Business Times report today (‘Insolvency limbo: the SGD bond market‘, 14 Jul), the Singdollar bond market is grappling with an unprecedented number of insolvencies.

Data compiled by BT shows that since Nov 2015, at least 13 issuers have defaulted on a total of 23 Singdollar bonds by missing coupon payments, failing to repay note holders at maturity, filing for judicial management, filing for bankruptcy protection and in one case breaching a financial covenant.

It represents S$3.2 billion in face value of Singdollar bonds and perpetual securities rocked by defaults, or 2.6 per cent of the S$123 billion outstanding Singdollar corporate bonds, which also include government agencies and statutory boards.

Among the 13 defaulters, 10 continue to remain stuck in various stages of restructuring while two have been liquidated. Interestingly, from the data compiled by BT, it shows that DBS is the leading bookrunner or underwriter of 11 out of the 13 bond defaulters, including 1 which was liquidated.

When asked if the bank has taken steps to improve disclosures during the bond IPO process since then, Clifford Lee, head of fixed income at DBS, gave a run-of-the-mill reply, “DBS has consistently through the years, applied best practice disclosure standards used in international offerings for its bond deals across markets, including the Singdollar bond market.”

“This entails making applicable business and risks disclosures in offering documents, together with financial disclosures from audited and/or reviewed financials,” he said.

Risky bonds sold to Ah Pek and Ah Ma through ATMs

A lawyer told BT, “When I first came in, I was actually very shocked by the whole process of how easy it is to raise a bond. Issuers want to issue bonds quickly but don’t want to spend on fees, so that comes at the expense of credit ratings, and the due diligence process.”

“A lot of corporate perps are geared to accredited investors who don’t necessarily understand what they are buying. The Singapore market has developed to be cheap, good and fast… I understand cheapness, but sometimes the cheapness makes you shake your head,” he said.

One type of bonds, called corporate perpetual, is particularly risky as companies do not guarantee fixed payments and have no legal obligation to redeem the principal. In US, such risky bonds are targeted at hedge funds but in Singapore, issuers target them at private banking clients who may be rich coffeeshop towkays without any deep knowledge in finance.

In some cases like Hyflux, they even issued such risky corporate perpetuals in small denominations to the man in the street, allowing Ah Pek and Ah Ma to buy them through ATMs.

In any case, all the investors are easily “sold” by the high yields dangling in front of them especially with the low interest rate regime operating in the last number of years. But now, the credit cycle has peaked, turning some of the high-yield instruments into “junk bonds”.

BT reported that in addition to the so-called “accredited investors” facing losses, more than 20,000 non-accredited mom-and-pop investors have been hit.