The Monetary Authority of Singapore (MAS) recently eased the rules, making it easier for retail investors to buy corporate bonds and likewise, the new rules make it easier for firms to offer bonds to retail investors.
This is great news for investors looking to diversify their portfolios with different instruments and also for firms looking to meet their funding requirements by tapping into retail investors.
What Are Bonds?
Simply put, bonds are a form of debt where the issuer (usually a company or the government) seeks to raise funds from the financial markets or from the institutional or retail investors.
By buying a particular bond, the investor in this case, is essentially providing funds to the issuer who will usually promise a fixed rate of return as compensation and most issuers will pay a fixed rate at regular intervals.
This regular stream of income makes it attractive for investors looking to diversify their investment portfolios with other instruments.
Also known as fixed income, bonds are relatively safe instruments that offer better returns amid consistently low savings rates at local banks.
What Is Bond Seasoning Framework?
That said, before the new rules (called the Bond Seasoning Framework) came into force, issuers have to go through a lot of paperwork such as drawing up a prospectus before they can issue a bond.
In addition, before the new rules came into force, corporate bond offerings were generally inaccessible to the public as most bonds required a minimum investment of about S$250,000.
The amount of paperwork along with its target market of institutional and high net worth individuals resulted in a rather dismayed local retail bond scene with only 4 retail bonds listed on the Singapore Exchange in 2015 with a slight increase this year.
The Bond Seasoning Framework now allows the issuer to offer the bonds in small denominations such as S$1000 after it has been first offered to both institutional and accredited investors and after a 6-month period.
To minimise the amount of paperwork involved, the new rules also make it possible for issuers to offer bonds with only product highlights instead of a prospectus if they fulfill certain specified thresholds. (Exempt Bond Issuer Framework)
What Does It Mean For Me?
This is certainly exciting news for retail investors especially those with smaller risk appetite and are on the lookout for investments that offer a regular stream of income and higher interest rates than the banks.
As stated in its press release, the changes are part of MAS’ overall efforts to widen the investment options available to retail investors through better access to simple investment products that are relatively less risky.Issuers too can expect a greater pool of investors making it easier for them to obtain funds for their expansion projects.
In the long run, these latest rules by MAS will create a much more vibrant retail bond market in Singapore contributing to its position as a financial hub.
What Do I Have To Look Out For?
That said, due diligence is necessary and one should pay attention to other factors apart from the interest rate that is being offered by the issuer.
For a start, check the issuer’s credit ratings and financial profile. Common rating agencies such as Standard & Poor assess an Issuer’s creditworthiness and rate it accordingly.
Be wary of unusually high interest rates as they are usually a sign of risky investments or issuers which have a high risk of default.
In those unfortunate situations, you may end up losing all or a large part of the original amount invested.To further protect investors, authorities have also set minimum requirements on the issuers’ size, history and creditworthiness.
With the launch of Singapore’s first listed private equity bonds this week by Temasek Holdings, retail investors can certainly look forward to greater product offerings and choices for parking their money.