Markets

Christopher Langner is a markets columnist for Bloomberg Gadfly. He previously covered corporate finance for Bloomberg News, and has written for Reuters/IFR, Forbes, the Wall Street Journal and Mergermarket.

Credit rating companies still haven't fully shaken off the bad reputation they got during the 2008 financial crisis, in spite of increased transparency regarding their decision making. Singapore is offering the perfect public relations how-not-to guide when it comes to showing the valuable role ratings can play.

Swiber's court-directed effort to survive marked the third time bondholders in the city-state have gone unpaid over the past 12 months. Of the S$875 million ($653 million) of corporate bonds that have defaulted in the past year, not a single one of the issuers was rated, and most securities went to high-net-worth individuals who aren't always rigorous in checking the financial health of a borrower.

As a result, when things went pear-shaped, the price of those notes dropped very quickly and buyers were thin on the ground, making it nearly impossible for creditors to recover any money.

Off a Cliff
The price decline of unrated bonds from Singapore companies that have defaulted has been especially rapid
Source: Bloomberg

Bonds with a credit score generally show a smoother trajectory on their way to default.

The reason is simple: As finances deteriorate, companies get downgraded and investors start moving out of the securities. Those who stay on board do so knowing they have a higher risk of losing money.

Swiber, for one, would have arguably been moved to the lowest speculative grade way before it defaulted, giving noteholders ample time to decide whether they wanted to sell or not. In Singapore, where only just over a quarter of corporate bonds are rated by one of the three major firms and there aren't any local outfits, that's hard to judge.

No Score
Almost 75 percent of outstanding corporate bonds denominated in Singapore dollars are unrated and of late, even fewer issues are getting graded
Source: Bloomberg

While there's no regulatory requirement that companies get graded in the U.S. and Europe, the rules on what investment funds can buy often reference a minimum credit score, which creates an incentive for borrowers to get one.

In Singapore, most of the very riskiest bonds end up in the hands of wealthy individuals, who are expected to be savvy about their investments but who also get loans from their banks to buy even more debt and boost returns. Perhaps the Monetary Authority of Singapore should consider a rule that states that private banks can only provide leverage for notes that are rated a certain level. That could minimize the fallout from default cases such as Swiber and fish meal producer Pacific Andes. 

One downside could be for the banks themselves. Under current rules, lenders can rely on their internal credit assessments when a company isn't graded by an external firm. Agencies such as Fitch, Moody's and S&P tend to downgrade issuers faster than a bank would and might sometimes force the hand of credit officers who may otherwise have been more complacent.

Actually, that's not really a downside. It would only mean that banks' shareholders wouldn't be surprised by large loans suddenly defaulting either. And as any financial institution should know, that's never a bad thing.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Christopher Langner in Singapore at clangner@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net