Measures to boost S'pore corp bond market welcome, but liquidity an issue

MEASURES to broaden and deepen Singapore's corporate debt market are a welcome development. For companies, debt issuance provides an important and attractive alternative to bank financing.

For investors, bonds are a core holding in portfolios, providing income and a welcome counter point to the volatility of equities. Demand is underpinned by an ageing population and a never ending thirst for yield despite expectations of higher interest rates in the near to mid term. Several initiatives by the Monetary Authority of Singapore are aimed at strengthening issuance and boosting confidence in a market buffeted last year by a wave of defaults in the oil and gas sector. The Asian Bond Grant, launched earlier this year, allows MAS to co-fund half of a first-time issuer's related issuance expenses by up to S$400,000. A second initiative is a grant to offset the cost of a credit rating by up to S$400,000. There will also be a green bond grant scheme to offset up to S$100,000 of the costs relating to the external review required for issuance.

The incentives are part of a comprehensive effort to enhance Singapore's standing as a premier financial hub, but there are challenges. Debt issuance has softened this year, based on data from Thomson Reuters which found a 23 per cent decline in bond proceeds in the year up to June. DBS Group Research finds a similar trend - S$19 billion was raised in 104 new issues in the whole of 2016, versus S$22 billion from 159 issues in 2015. While sluggish domestic economic growth is likely to have dampened capital market activity, the travails of oil and gas issuers - notably Swiber's and Swissco's collapse and consequent defaults - are likely to have spooked smaller high-risk issuers. Last year, five companies defaulted on some S$1 billion of debt, and KPMG expressed concern that defaults would widen to developers as well.

But quite apart from cyclical concerns, there are structural issues as well, among the largest of which is the dearth of secondary market liquidity. This has been a global pressure point since the 2008 financial crisis depressed risk taking among broker-dealers and banks, making them less willing to engage in market making in securities. The MAS noted this in its Singapore corporate debt market report in 2016, remarking that while banks continue to provide prices for a majority of bonds issued here, the amounts they are willing to transact may be smaller for weaker credits. But there is yet another distortion in the local market: the largest consumers of junk debt has been private bank clients, driven by the appetite for high yields. Their typically concentrated holdings mean that they will likely find no buyers in a crisis when everyone rushes to sell, as they painfully discovered in recent months.

MAS's offer to fund issuers' credit rating expenses may go some way to shore up confidence in the market. There is, however, no free lunch. Higher rated bonds carry lower yields, and investors will have to grapple with the trade-offs that their choices entail. On the bright side, the International Monetary Fund points to the Asia-Pacific as the world leader in growth, and projects an uptick in growth this year. Interest rates and inflation remain muted, underpinning demand for investible debt. While there are worries about corporate indebtedness, issuance is likely to pick up and will be well supported as appetite for high yield is still robust. The silver lining is that private clients may well tread more carefully and refrain from chasing yield. In the long run, it pays to diversify.