Temasek disagrees with tighter regulations on riskier bond-like products and says “gatefolds” help

Last Fri (5 Apr), a member of the public Dr Jeremy Teo Chin Ghee wrote on ST Forum asking the Monetary Authority of Singapore (MAS) to consider tightening regulations around the issue of perpetual securities and preference shares by companies in favour of the regular retail bonds.

His call came in the wake of the Hyflux debacle, which saw retail investors losing nearly all their investments in Hyflux’s perpetual securities and preference shares.

Dr Teo argued that retail bond offerings increase transparency on the financial health of a company as perpetual securities, even though they are permitted to be recognized as equity under current accounting standard, “are, for all intents and purposes, debt”. Hence, he said that the practice of recognizing perpetual securities as equity is “questionable”.

“Institutional investors can calculate the true gearing of a company, but the average investor is ill-equipped to do so and may be easily misled,” he added. And, he pointed out that bonds have a higher priority in liquidation than perpetual securities and preference shares and can help to “protect (retail bond) investors”.

“Coupon payments for bonds also cannot be deferred without defaulting and there is a fixed redemption date, providing additional protection for small investors,” he explained.

Temasek responds immediately

Then, out of the blue, Temasek’s Head of Public Affairs Stephen Forshaw, responded on ST Forum today (8 Apr) disagreeing with Dr Teo’s call for tighter regulations on riskier bond-like product offers.

“Dr Jeremy Teo Chin Ghee raised interesting points in his letter,” Mr Forshaw wrote. “We believe retail investors should have access to a wider range of risk-reward products, rather than be cut from riskier products through tighter regulations – the current regulations already require comprehensive disclosures of risks.”

Mr Forshaw said that the key is to ensure the risk disclosures of a financial product be made accessible and understandable to “a lay reader”.

He added that such information can be made into a “more accessible format” via a gatefold, which is actually a foldout.

“Our research led us to a different approach in respect of our first Temasek Retail Bond,” he said. “We took a leaf from the issue of Astrea IV Private Equity Bonds, and made a special effort to provide a more accessible format of risk disclosures via a gatefold.”

“The gatefold supplemented the offering documents, and was intended to be retail-friendly and easy to understand,” Mr Forshaw further explained.

“In particular, the gatefold highlighted the associated risks in an accessible manner. Feedback was very positive on the presentation of pictorials, flowcharts of fund flows, credit ratios and FAQs for both the Astrea IV and Temasek gatefolds.”

Mr Forshaw encouraged others to follow Temasek’s footsteps by also using gatefolds in their offering documents so as to “highlight the key credit risks of their businesses”, and hence, ensuring retail investors would know about the risks before investing in riskier bond-like products.