Proposed bond default insurance doesn't go far enough

THE suggestion for the Singapore market to have bond default insurance coverage is, no doubt, well meaning and if it pulls through, could provide some measure of relief to anxious holders of distressed debt.

However, the form of insurance proposed doesn't lend comfort to one chief concern - the fate of noteholders' investments in a default event. As such, it doesn't meet the urgent need for a more sustainable, wholesome solution amid the wave of defaults to have hit the domestic bond market.

Jointly submitted by the Securities Investors Association (Singapore) and law firm Rajah & Tann to the Monetary Authority of Singapore, the proposal essentially involves bond issuers taking up an insurance policy at the time of issuance when they are in a relatively healthy financial state. In the event of a default, payout from the policy can go towards funding bondholders' legal and financial advisory fees which observers reckon could cost around S$100,000-S$500,000. The policy can also be invoked to pay bond trustees to take action on behalf of investors.