Finance

Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

An undesirable side effect of the growth of private banking in Asia has been the dumbing down of bond investing.

What in the U.S. and Europe is still the preserve of sophisticated institutional investors has, in the East, morphed into a playground for the careless rich. Things have gotten so bad that a Singapore private-banking client, when informed of a default by a Malaysian energy-services firm, thought the coupon had something to do with free parking, as Reuters reported this week.

Dumb Money
Private banks sold Singapore dollar bonds to clients by the truckload; now the issuers are going bust
Source: Monetary Authority of Singapore

The neophytes are panicking. Some are getting crash courses in creditor rights on WhatsApp message groups. Bankers, meanwhile, say they would welcome more scrutiny by credit rating agencies. Never mind that they got rebates of as much as 1 percent as an incentive to sell unrated securities. Worse, this side payment from issuers generally isn't disclosed to investors.

The Monetary Authority of Singapore is tightening norms on who can be an "accredited" investor, but the horse may have already bolted.

Swiber Holdings Ltd., a provider of construction services for oil and gas projects, is already in judicial administration. On Monday, rig supplier Swissco Holdings Ltd. said it, too, wanted court-supervised management. KrisEnergy Ltd. is seeking to restructure S$330 million ($233 million) of notes, while a bondholder of Malaysia's Perisai Petroleum Teknologi Bhd. has filed a winding up petition. On Tuesday, Rickmers Maritime failed to pay interest on S$100 million of notes.

The common thread running through these defaults? At the other end are a bunch of investors who never cared to glance at a trust deed of a bond issue, and have little familiarity with the businesses to which they're lending.

Not all private banks are peddlers, and not all their clients are gullible buyers, but a lot of toxic waste has entered the market simply because financial firms needed the income to cover their bloated cost structures, including a surge in compliance-related investments.

To be clear, compliance burdens are rising for everyone because some banks have been very naughty, as a multi-country investigation into allegations of loot and laundering at a Malaysian state investment fund has shown. Shareholders won't foot the entire bill; that will fall partly to customers. Ignoramuses have to help pay for banks' rosy forecasts of Asia's future as well as their own -- or their rivals' -- bad behavior.

We All Fall Down
Singapore dollar bond issues since 2014 that are now trading below 60 cents on the dollar
Source: Bloomberg
*As of Nov. 17, 2016.

Not only do private-bank clients rush in where more experienced investors would fear to tread, when the former dominate -- as they do for issues that are too small for indexes that invite institutional participation and scrutiny, like JACI or CEMBI -- the dice is often loaded against rationality.

A company can offer to buy back its debt cheaply, and threaten to clear out investors who refuse to tender their bonds for even less money. A professional asset manager who's upset about this arm-twisting can't assume private bank customers will remember to object to the insertion of the clean-up call in the extraordinary resolution proposed by the company. Such a scenario is playing out now with Tata International Ltd.'s perpetual notes in Singapore.

In other words, the rich can't even be trusted to act in their own best interests.

The recent spate of delinquencies has scared Asia's wealthy from blindly chasing yields. If they trust professional fund managers -- or even robots -- when they return, institutional investors will heave a sigh of relief.

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

  1. Both JPMorgan Chase & Co. bond indexes.

  2. The Indian company asked creditors to return their Singapore dollar-denominated bonds at 103 cents on the dollar, which many thought was a lowball offer. But if they didn't tender, and enough private-bank clients forgot to object to the clean-up clause, institutions that held out wouldn't even get the market price. So far, big investors have stalled the buyback. The Tata offer is now 100 cents on the dollar and the company has come close to the 75 percent support it needs to carry its plan through. If it succeeds, it would raise fresh funds by selling U.S. dollar notes that offer even worse terms.

To contact the author of this story:
Andy Mukherjee in Singapore at amukherjee@bloomberg.net

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