Singapore’s bond market to face difficulties in 2017?
In 2016, Singapore’s bond market faced a series of defaults as companies associated with the oil and gas sector found themselves in a position where they were unable to meet their repayment commitments. According to a report in Bloomberg, five Singapore firms defaulted on bonds of a total value of nearly S$1bil last year.
Swiber Holdings failed to meet its coupon payments repeatedly. The company is a provider of services to the offshore oil industry. Recently, it has been under investigation by the Commercial Affairs Department, a branch of the Singapore Police Force. A newspaper report states that the reason for the investigation is not clear.
Rickmers Maritime Singapore, a firm that provides services and consultancy for the management of shipping investments also defaulted on its coupon payments. The company has S$100mil of bonds on which principal is due in May 2017. These pay an interest of 8.45%. Rickmers has proposed that investors swap these for bonds payable in November 2023 with a step-up interest starting from 2.7% in 2019 and rising to 5.2% in 2023.
What does 2017 hold in store for Singapore’s bond market?
A recent Reuters report reveals that Singapore dollar bonds of a value of S$22bil are callable or due to mature in 2017. Many bond issuers may not be in a position to meet their commitments and would need to go in for refinancing.
But rising interest rates may significantly affect their cost structures. Bond issuers may have to rethink their plans in view of the US Fed raising rates by 25 basis points in December. The Fed’s guidance of three rate increases in 2017 instead of the anticipated two, has also dampened the spirits of issuers.
The spate of defaults by bond issuers in 2016, had a negative impact on the primary bond market in Singapore last year. The total value of bonds issued in the year was just S$17.5bil, an 18.5% decline from the level in 2015. Volumes in 2016 were also the lowest since 2009, a year that saw issues totalling S$11.6bil.
The last quarter of the year recorded very poor volumes. Just S$1.9bil in bonds were issued in the Singapore market. Clearly, the bond market is going through a bad phase and is in need of revival.
Role of the Monetary Authority of Singapore
At a recent conference, Jacqueline Loh, deputy managing director of MAS, addressed the issue of “Strengthening Asia’s Bond Markets”. Loh pointed out that the defaults and restructuring that had hit the Singapore bond market in 2016 was restricted to the oil and gas sector.
But Singapore’s bond market is unique in the respect that large numbers of individual investors are bondholders. In western markets, it is usually institutional investors who take up bond issues. A Reuters report reveals that some high-yielding Singapore dollar bonds are held by more than 100 individual investors. There are no institutional investors involved at all.
Why should this matter? In fact, this point becomes crucial in the event of a default. Individual investors have relatively limited resources and find it difficult to coordinate their efforts to pressurise defaulting bond issuers.
The problem is compounded by the fact that individual investors cannot contact others who hold the same notes as only the trustees have the ability to identify all bondholders. The trust deed does not allow a trustee to arrange a meeting of bondholders except in certain circumstances. All these conditions make it difficult for bondholders to get together so that they can make a collective effort to protect their interests.
MAS deputy managing director Jacqueline Loh has said that the regulator has “… received feedback calling for a review of the regulations and market practices around the Singapore bond market. Some ideas include… recourse for investors when a bond defaults…. We are considering these feedbacks and will respond soon”.
But the damage is already done
Bonds issued by various companies are trading at values well below their issue prices. This chart illustrates the dollar value of bonds that trade at 70 cents or less and which are due to mature in the period from 2017 to 2019.
Many of the bond issues made since 2014 are trading at extremely low prices. Large numbers of Singapore’s individual bondholders have suffered losses in 2016. They will be very careful before participating in any fresh issues in the current year.