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Singapore’s Millionaires Humbled in Local Bond Restructurings

  • Fragmented wealthy investors face hurdles: Bank of Singapore
  • Singapore dollar bond market has S$2 billion due by year-end

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 Ltd. The market faces more tests with Swiber Holdings Ltd.’s July 6 maturity among S$2 billion ($1.5 billion) of notes coming due by year-end.

Bank of Singapore said fragmented wealthy investors face hurdles in restructuring talks, including organizing 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 for Asia Pacific Financial Services at Ernst & Young. “If you’ve got a case where there is no large creditor and hence the creditor’s resolution process is going to be very painful then maybe you would have thought one of the private banks may take it upon themselves to use their own credit resources within their organization or reach some arrangement with their investors whereby the investors will share the costs.”

In February, Jakarta-based Trikomsel said that claims submitted through a trustee weren’t admitted to vote, meaning noteholders had to submit claims directly in the Indonesian court in the local language. The company recommended the investors obtain “their own legal advice” in a January filing. Ernst & Young audited Trikomsel’s accounts until the end of 2014 and it is no longer a client, Lynette Quah, a spokeswoman at the consulting firm said.

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 percent 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 $23.8 billion in the past half decade, compared with $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 Ltd. They had returns of 2.7 percent 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 (Singapore) Ltd. 

“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 the Swiss private bank.

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 Ltd., Oversea Chinese Banking Corp.’s private banking unit.

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.

Tests Ahead

“It’s logistically difficult as you can imagine,” he said. “If you own $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?”

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.”

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