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Singapore's millionaires humbled in local bond restructurings

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Singapore's wealthy investors are discovering they lack clout in negotiations when high-yield bond investments blow up.

[HONG KONG] Singapore's wealthy investors are discovering they lack clout in negotiations when high-yield bond investments blow up.

PT Trikomsel Oke became the first company to default on Singapore dollar debt since 2009 when it failed to repay a bond coupon in November last year, followed shortly afterwards by Pacific Andes Resources Development. The market faces more tests with Swiber Holdings's July 6 maturity among S$2 billion of notes coming due this year.

Bank of Singapore said fragmented wealthy investors face hurdles in restructuring talks, including organising negotiating groups and potentially prohibitive legal fees.

Ernst & Young LLP said private banks could play a bigger role in helping clients through the process when there are no large creditors to drive the restructuring.

"The hunt for yield nearly always ends in tears," said Keith Pogson, senior partner, Asia Pacific Financial Services at Ernst & Young.

"You would have thought one of the private banks may take it upon themselves to use their own credit resources within their organisation or reach some arrangement with their investors whereby the investors will share the costs."

Singapore's high net-worth individuals almost doubled since 2008 to 2015, according to Capgemini SA, helping drive growth in the city's private-banking industry and bond market. Private banks bought 44 per cent of local-currency notes sold in 2014, making them the largest investor group before a slump in regional currencies and slowing commodity prices triggered defaults, Monetary Authority of Singapore data show.

HANGOVER FELT

That helped average annual issuance of Singapore dollar bonds jump to US$23.8 billion in the past half decade, compared with US$16 billion in the preceding five years, according to Bloomberg-compiled data. The hangover from that binge is starting to be felt. Junk-rated Singapore companies face a wall of debt maturities and must find funds to repay S$2 billion of local currency bonds for the rest of this year, S$5.6 billion in 2017 and S$4.5 billion in 2018, according to Bloomberg-compiled data.

As the defaults emerged, local junk bonds delivered losses of 1.6 percent in the three quarters ended March 31, according to an index compiled by Markit. They rallied 2.7 per cent this quarter.

NO CLOUT

The average credit quality of companies listed on the Singapore Exchange has deteriorated over the past five years as the ratio of operating earnings to interest expenses weakened to 2.4 times from 7.2 times, Bloomberg data showed.

As companies that are likely to default in the Singapore dollar bond market are small and under-researched, the creditors involved are unlikely to be big global funds that have the expertise to lead credit committees, according to Lombard Odier. 

"If the bond is held by retail investors or the ownership is very segmented, then investors have less negotiating power," said Dhiraj Bajaj, senior vice-president at Lombard Odier.

While institutional investors typically have bigger bond holdings and more clout in seeking higher recovery rates, the costs for fragmented private banking clients can make it not worth the effort, said Todd Schubert, head of fixed-income research at Bank of Singapore, Oversea Chinese Banking Corp.'s private banking unit.

TESTS AHEAD

"It's logistically difficult as you can imagine," he said. "If you own US$200,000 and the bond is trading at 30 cents and it's going to cost you thousands of dollars to engage legal counsel you might not get paid any more at the end of the day, then why do it?"

In February, Jakarta-based Trikomsel said that claims submitted through a trustee were not admitted to vote, which meant that noteholders had to submit claims directly in the Indonesian court in the local language.

Trikomsel recommended that noteholders obtain "their own legal advice" in a January filing on the Singapore Exchange. Hong Kong-based Pacific Andes said on June 13 that while a legal representative will be made available to bondholders only for general matters, individual investors are asked to seek their own counsel for legal advice.

S&P Global Ratings said bonds sold in Singapore suffer a lack of coverage.

"One of the problems with private banks could actually be that they just invest and buy and hold" in the Singapore market, said Xavier Jean, analyst at S&P in Singapore. "There is not necessarily as much surveillance and coverage as there might be."

BLOOMBERG