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AMID unprecedented local bond defaults as offshore and marine-services firms convulse, Singapore's watchdog for minority shareholders and a leading law firm are proposing an insurance scheme to help bond investors.
The Business Times understands that the Securities Investors' Association of Singapore (SIAS) and Rajah & Tann Singapore have jointly submitted to the Monetary Authority of Singapore a two-pronged proposal which calls for bond issuers to take up an insurance policy at the time of issuance, so that aggrieved investors will be protected in the event of a default.
If there is a default, the payout from the policy can go towards funding the costs of calling for meetings and legal and financial advisory fees, all of which are now largely borne by bondholders.
Observers say that such costs could burn a hole of between S$100,000 and S$500,000 in the pockets of frazzled investors, who would already be grappling with the fear of losing their life savings.
The other proposed reform is for bond promoters to allocate a minimum 30 per cent of total issue to institutional investors to diversify the investor base. It is hoped that, in a default event, institutional investors will take up the cudgels for their retail counterparts who have less financial muscle and experience.
Contacted by BT, SIAS president David Gerald confirmed that the joint proposal was submitted to the regulator.
He said: "Where can bondholders who are in distress get the money to cover their legal costs and so forth? They also have difficulties coming together with others in the same predicament. Their predicament is heightened as trustees of these bond issues are not able to assist them either.
"There has to be a mechanism through which retail bondholders won't be stranded in a default event."
The call for reforms comes in the wake of bond defaults by offshore- and marine-services firms battered by a prolonged commodity slump which has led to deep cuts in spending on exploration; in turn, this has hurt cash flow and compromised the firms' ability to meet debt obligations.
Bondholders here generally belong to a disparate group of individual investors. They include many "mom and pop" investors who have put up S$250,000 per issue, which is a sizeable chunk of their retirement nest egg.
In a default event, it is near impossible to canvas for support from other investors because they have no access to the list of investors.
In addition, they have found cold comfort from the bond trustees, unless an upfront fee had been coughed up.
Given their helpless situation, investors have turned to SIAS for redress. It appears their concerns have been heard.
Some of these investors had put money in notes issued by Nam Cheong, Ezra Holdings, Rickmers Maritime and Marco Polo Marine. In many of these cases, SIAS facilitated townhall sessions between investors and the issuers.
Still, these investors face a double whammy. A market watcher said: "They were supposed to collect coupon payments. Now they face the risk of losing their savings on top of being asked for more money to fund the cost of seeking redress."
Against this backdrop, the latest proposal for bond-default insurance coverage could bring some hope and cheer to Singapore's bond market.
An observer said: "It's a bold initiative by the private sector to get issuers to fund the insurance premium when they are in good shape and raising funds."
However, he said he was doubtful about the merits of the proposal to set aside a mandatory tranche for institutional investors for bond issues.
"That's not workable. I'm very sceptical," he said.
His argument is that there is a lack of demand for unrated corporate bonds and, in some cases, even rated issues, from institutional investors, so issuers could face difficulties raising funds if there are no takers or a lack of takers for their bonds.
"We can't, as a market, compel mandatory take-up of bond issues. It will make our market very unattractive . . . It's counterproductive," he said.