New framework needed for trading corporate bonds

[Boon]

New framework needed for trading corporate bonds
Goh Eng Yeow
The Straits Times
Wednesday, Dec 25, 2013

Retail investors frustrated by bank deposit rates and the flatish stock market are often tempted by bonds but anomalies around some Genting issues show that it can be a perplexing game. The casino operator issued two tranches of perpetuals - a bond-like instrument that offers a fixed payout but no shareholder rights - last year. One tranche worth $1.8 billion was sold to fund managers and subsequently traded in the over-the- counter (OTC) market via a network of dealers. The other $500 million tranche was snapped up by retail investors about a month later and traded on the Singapore Exchange (SGX). To the lay investor, the two tranches of bonds are identical for all intent and purposes, enjoying a 5.125 per cent coupon rate. Yet, the institutional tranche of Genting perpetuals is languishing at $94.48 - or a 5.5 per cent discount to its $100 issue price - while the SGX-listed bonds are being traded at a 4.5 per cent premium to its $1 issue price at $1.045. Now, you would think that it is a no-brainer to buy the institutional Genting perpetuals since they are effectively trading at a 10.6 per cent discount to their retail brethren. But if you are a retail investor with limited cash resources, you may not enjoy the better pricing which the institutional Genting perpetuals command as you need at least $236,200 to buy just one lot of the stuff. It is not wise to commit such a big sum to just one corporate bond. After all, investing in bonds - even those issued by top-notch companies - carries risks. As the global financial crisis five years ago has shown, even the biggest and strongest firms are not immune to collapse............................................................................

See more at: http://business.asiaone.com/news/new-fra...N8bL5.dpuf

[tanjm]

New framework needed for trading corporate bonds
Goh Eng Yeow
The Straits Times
Wednesday, Dec 25, 2013

Retail investors frustrated by bank deposit rates and the flatish stock market are often tempted by bonds but anomalies around some Genting issues show that it can be a perplexing game. The casino operator issued two tranches of perpetuals - a bond-like instrument that offers a fixed payout but no shareholder rights - last year. One tranche worth $1.8 billion was sold to fund managers and subsequently traded in the over-the- counter (OTC) market via a network of dealers. The other $500 million tranche was snapped up by retail investors about a month later and traded on the Singapore Exchange (SGX). To the lay investor, the two tranches of bonds are identical for all intent and purposes, enjoying a 5.125 per cent coupon rate. Yet, the institutional tranche of Genting perpetuals is languishing at $94.48 - or a 5.5 per cent discount to its $100 issue price - while the SGX-listed bonds are being traded at a 4.5 per cent premium to its $1 issue price at $1.045. Now, you would think that it is a no-brainer to buy the institutional Genting perpetuals since they are effectively trading at a 10.6 per cent discount to their retail brethren. But if you are a retail investor with limited cash resources, you may not enjoy the better pricing which the institutional Genting perpetuals command as you need at least $236,200 to buy just one lot of the stuff. It is not wise to commit such a big sum to just one corporate bond. After all, investing in bonds - even those issued by top-notch companies - carries risks. As the global financial crisis five years ago has shown, even the biggest and strongest firms are not immune to collapse............................................................................

See more at: http://business.asiaone.com/news/new-fra...N8bL5.dpuf

I have been thinking about this. I think it might be possible to (for example) have 20-30 people put up some money. Have the money handled by a trustee and set up a collective investment scheme such that at the initiation, you buy a fixed set of bonds and hold to maturity. There are no trading decisions to be made and limited factors for mischief. You get a lawyer to set it all up. The only variable is the initial set of bonds which you agree to at inception. The set of bonds should ideally have similar maturities so that the trust winds itself up within a time window (say all within one year time window). This way, you gain access to this market and at the same time get some diversification.

The problem is I'm not sure what are the expenses involved and the red tape/legal niceties necessary. Not sure if anyone here has any inkling about this. The expenses would probably drive the minimum size of the fund, though another factor would be that you'd ideally want to hold at least 20 bonds (that's a 5 million total investment) to be diversified.

There are bond ETFs on the exchange, but the problem is that they all involve foreign bond holdings (except the one holding SGS treasuries).

[tanjm]

I'd be thinking there might even be some scope for a retail bank like DBS to provide some infrastructure support (common trustee/legal services) for their mass affluent customers (i.e. not rich enough for private banking). They'd earn some fees and help develop bond market liquidity for their rich clients.

MAS could help also by streamlining the process for this, and to provide DBS with a regulatory cover that DBS has no legal liabilities once a trust is set up in a standard way.

[money]

Perhaps retail investors should really question the attractiveness of the Genting perpetuals and not buy into the perpetuals like bees to honey

[tanjm]

Perhaps retail investors should really question the attractiveness of the Genting perpetuals and not buy into the perpetuals like bees to honey

You miss the point. There's a big universe of SGD corporate bonds out there at 250k a pop that would be great for a small(ish) investor to access.

The other thing I could hope for would be for one of the ETF houses to set up a high yield SGD ETF for example. But the likelihood is that they'd take their cut first since bond pricing is not as transparent as equity pricing.

[yeokiwi]

I think it might be possible to (for example) have 20-30 people put up some money.

There are quite a few scenarios that can derail this arrangement.
1. Bankruptcy. Should the entire bond investment be liquidated if any of the members is declared bankrupt?
2. Fund from illegal sources. The state may want to seize the fund that is put up by the member who had obtained the money illegally.
3. Death. This is less of an issue since the clause of no early redemption can be written into the contract but nevertheless, the kins of the death may want to get the money back.

I suppose it is possible to build in some flexibility into the framework to handle the above scenarios but it will, at the same time, increase the cost of administrating such framework.

And, the yields for such bond issues are already not that high currently to justify having an elaborate arrangement between 20-30 persons.