Singapore Exchange’s regulatory arm, SGX RegCo, announced recently that it has established a working group of industry professionals and investors to review the regulatory framework for Singapore’s retail bonds market.
I do not have any power to influence the decisions of the working group, but I was inspired to pen my thoughts on the matter yesterday after meeting a friend of mine who’s a veteran in Singapore’s financial journalism scene.
More specifically, my thoughts are on …
(1) The type of information that I think is important to be presented to investors if a company is going to issue a retail bond, and
(2) The format of how the information is to be presented.
Chinese New Year is just around the corner, so my early CNY wish is for my thoughts to reach the eyes of the powers that be for consideration.
Setting the stage
During our meeting, my journalist friend (he’s retired now) reminded me that Singapore has an ageing population, which would likely boost the demand for retail bonds in the years ahead.
This situation makes the issue of improving the regulatory framework for retail bonds in Singapore a critical matter to me.
Hyflux’s infamous collapse in 2018 affected 34,000 individual investors who held its preference shares and/or perpetual securities – and I’m hurt when I hear of such stories.
Preference shares and perpetual securities are not technically retail bonds. But the three types of financial instruments are close enough in substance to be considered the same thing for the purpose of my discussion.
There’s no way to conduct a counterfactual experiment.
But I think it’s reasonable to believe that many of the affected-investors in the Hyflux case could have made better decisions if they had access to pertinent information about the company that they can easily understand.
Right now, there are product highlight sheets that accompany retail bonds in Singapore: Here’s an example for Hyflux for its 6% perpetual securities that were issued in May 2016. But there is information that is lacking in the sheets, and it’s not easy for layman-investors to make sense of what’s provided.
With this background, let me get into the meat of this article.
Type of information to be presented to investors
If a company is going to issue a retail bond, I think there are a few important pieces of information that should be presented to investors.
The purpose is to allow investors to make informed decisions on the risk they are taking, without them having to conduct tedious information-gathering.
These information are:
- Can the bond be redeemed? Who gets to call the shots, and at what terms?
- The dollar-amount in annual interest as well as total interest that the company in question has to pay for its retail bond issue.
- The operating cash flow of the company, and capital expenditures, over the past five years.
- The amount of debt, cash, and equity the company currently has, and the pro-forma amount of debt, cash, and equity the company will have after its retail bond issue.
- Is the bond issue underwritten by the banks that are selling the bond?
- What is the money raised by the issue of the retail bond used for?
I note that the information above is meant for companies that are not banks or real estate investment trusts (REITs). Tweaks will have to be made for the banks and REITs but I believe my list above is a good place to start.
Format of information-presentation
I think that the information I mentioned above will be most useful for investors if they are presented all in one page, and are accompanied by descriptions of the information, and their significance, written in layman’s terms. Here are my suggestions.
For “Can the retail bond be redeemed? Who gets to call the shots, and at what terms?”
- Description: A retail bond that can be redeemed means that the retail bond issuer (the company in question) is required to pay the retail bondholder (you) the full amount of the retail bond. Sometimes, the company in question gets to determine when to redeem the retail bond; sometimes, you get to determine when the retail bond is redeemed.
- The significance: The timing of when you can get your capital back is affected by (1) whether the retail bond can be redeemed; and (2) who gets to determine when the retail bond is redeemed.
For “The dollar-amount in annual interest as well as total interest that the company in question has to pay for its retail bond issue.”
- Description: A company has to pay interest on the retail bond that it is issuing – and that interest is paid with cash.
- The significance: If you know how much interest the company is paying each year, and in total, for a retail bond issue, you can better understand its ability to pay the interest.
For “The operating cash flow of the company, and capital expenditures, over the past five years.”
- Description: The operating cash flow of a company is the actual cash that is produced by its businesses. Capital expenditures are the cash that a company needs to maintain its businesses in their current states. Operating cash flow less capital expenditure, is known as free cash flow.
- The significance: There are no guarantees, but knowing the long-term history of a company’s operating cash flow and free cash flow can give you a gauge on the company’s ability to produce cash in the future. The level of a company’s operating cash flow and free cash flow is important, because a company needs to pay the interest on its retail bond, as well as repay its retail bond, using cash. If operating cash flow is low, the company will find it tough to service its retail bond. If operating cash flow is high but free cash flow is low, it is also tough for a company to service its retail bond; a reduction in capital expenditure can increase free cash flow, but it will hurt the company’s ability to generate operating cash flow in the future.
For “The amount of debt, cash, and equity the company currently has, and the pro-forma amount of debt, cash, and equity the company will have after its retail bond issue.”
- Description: A company has cash, properties, equipment, software etc. These are collectively known as its assets. A company also has bank loans, bonds that it has issued, money that it owes suppliers etc. These are collectively known as its liabilities. The equity of a company is simply is assets minus liabilities. The term “pro-forma” in this case is used to refer to how a company’s finances will look like after it issues its retail bond, based on the latest available audited information.
- The significance: If a company has good financial health, it is in a stronger position to repay and service its retail bond. To gauge a company’s financial health, you can look at two things: Firstly, its cash levels relative to its debt (the more cash, the better); and secondly, the ratio of its debt to its equity (the lower the ratio, the better). Debt in this case, is the summation of a company’s bank loans and other bonds.
For “Is the retail bond issue underwritten by the banks that are selling the bond?”
- Description: A retail bond that is issued by a company may be underwritten or not underwritten. An underwritten retail bond is a bond that is purchased by a bank that is then resold to you.
- The significance: If you and other investors do not want to purchase an underwritten retail bond, the bank involved ends up holding it. So if a bank underwrites a retail bond, it typically means that it has more confidence in the bond as compared to one where it does not underwrite.
For “What is the money raised by the issue of the retail bond used for?”
- Description: The company in question is issuing a retail bond to raise money for specific purposes.
- The significance: A company can issue a retail bond to raise money for many reasons. There is one particular reason that typically tells you you’re taking on higher risk: The company is issuing a retail bond to repay a previous loan or bond that has a lower interest rate.
Get Smart: Taking responsibility
Ultimately, individual investors need to be responsible for their own actions – it’s not the regulator’s responsibility to offer total protection.
But in the case of Singapore’s retail bonds market, I think there is still scope for significant improvements to be made in investor-education and other aspects.
My suggestions above are meant to highlight the most crucial information about a company that is issuing a retail bond so that individual investors can quickly gain a good grasp of the level of risk they are taking on.
The working group is expected to present its recommendations to SGX RegCo sometime in the middle of this year. A public consultation will also “likely take place by the end of the year.”
May the recommendations put forth by the working group lead to investors in Singapore having a better experience in the retail bonds market!
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Disclosure: Chong Ser Jing owns shares in Hyflux.
Note: An earlier version of this article was published at The Good Investors, a personal blog run by our friends.