What MAS's Bond Seasoning Framework Means To You
MAS recently announced two highly-anticipated regulations that facilitate corporate bond offerings to retail investors. This comes nearly after two years of consultation with market participants. Despite the strong growth in local bond markets over the past decade, retail participation remains muted. A mix of higher costs of issuing retail bonds due to prospectus requirements and longer issuance process has led to issuance only in high yield names (PREHSP, OHLSP, ASPSP, HYFSP).
Source: S’pore Corporate Debt Market Development 2015, MAS
Two Frameworks
Central to the new regulation is removing the need for prospectus in a retail issuance. Unlike an equity offerings, bond issuances are often launched with just a few pager termed the “offering circular” (OC) or termsheet containing key details and covenants. This has allowed issuers to launch bonds in as short as 4 days (versus 12 days for retail), according to an ADB report. Criteria for eligibility remain stringent, but the framework minimises the disincentives for issuers to reach out to the retail market through simplified issuance process and tax breaks (anecdotal additional costs of approx. SGD100k to issue a retail bond)
Source: MAS
Under the Bond Seasoning Framework, eligible issuers can ‘retap’ the market after an initial 6 month listing of a new bond on SGX, subject to certain issuance conditions. The bonds can also be re-denominated into smaller lot sizes to facilitate participation by retail investors. However, issuers that meet the tougher requirements under Exempt Bond Issuer Framework can look to issue retail bonds without a six months wait. To mitigate risks to the retails investor, MAS has guided that the retail bonds should not contain option features (change-of-control call/puts, delisting puts, convertibility to equity and subordination) except for common regulatory call feature. This requirements will exclude bank Tier 2 and Tier1/AT1 debt, perpetuals as well as convertible bonds.
Contextualising It Given the above metrics, one will quickly figure that potential issuers are likely to come from the High Grade space. Applying the Bond Seasoning Framework retrospectively to issuances in 2015, more than half the eligible pie would be made up of local quasi-sovereigns such as HDB, LTA while corporates and Temasek-linked companies (TLCs) contribute circa 15% each to total eligible issuance. On a count basis, 31 out 165 issues would be eligible for ‘seasoning’. Though small, 31 issues represents a great leap from the existing 11 (or 17, if including preferred shares) listed retail bonds on SGX.
Likewise, running the 776 SGX-listed companies through the Exempt Bond Issuer Framework generates a list of 41 eligible issuers. MAS estimates put those numbers at 60, inclusive of non-listed issuers.
Sample of potential eligible issuers currently listed on SGX
Source: Bloomberg
Filling The Gap
The introduction of the new framework and the potentially number of high grade issuance that follows will help fill the long-held gap between the existing high yield (HY) and risk free (S’pore Savings Bonds/S’pore Government Securities), providing retail investors with more choices across the credit spectrum and greater diversification benefits.
Positive Development
The new framework and announced tax break will lower the barriers for high-grade issuers looking to tap the retail market. Investors stand to benefit from greater convergence in interbank and retail pricing as frictional costs are minimised (as opposed to the usual tighter retail pricing than interbank to compensate for costly documentation). Nonetheless, the new framework alone cannot be the panacea for growth of the retail market. With a lack of incentive for retail issuance (barring any liquidity crisis), issuers would likely be slow in warming up to the idea of retail issuance. Issuance is likely to be led by government-related entities heeding the new policy initiative. Retail interest in low-yielding super high-grade AAA bonds (eg. Temasek/HDB) remains unknown while the lack of credit ratings continues to blur credit differentiation. Nonetheless, the announced framework is a development in the right direction, albeit slowly but surely.
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