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Towards an Inclusive Financial System


The SGD corporate bond market has seen record volumes in 2012. Asiaone reported a whopping $31 billion issuance, almost 50 per cent higher than that for 2011 and nearly five times more than a decade ago. This development is indeed a great cause for celebration, especially in cementing Singapore’s status as a financial centre. It bodes well that the SGD market is gaining acceptance by both corporations and investors. The upsized platter had served the insatiable appetite stemming both local and foreign demand.

However a quick analysis will show that this boom hadn’t been inclusive

Small Borrowers: Cinderella and Merchant of Venice

Starting with corporations that issued bonds in 2012, then applying further filters to consider those issuers that prima facie, conduct substantial business in Singapore, I aimed to analyse whether local businesses participated in this “grand ball” and if so, who were they. In this context, I found that local issuers had accounted for S$21 billion or 68% of total issuance in 2012.

So far so good it seems…

But a closer look will reveal that this was an exclusive party, attended mostly by the big boys – the big local corps that are frequently government linked. (For instance, entities under the “Capita”, “Mapletree” and “Ascendas” group are all government linked.) The 3 smallest issuers by market cap were Swiber, Nam Cheong and Banyan Tree whose shares were valued between S$397 mio and S$536 mio (as at 21 March 2013).

A well-known fact is that big corporate issuers have no lack of bankers pandering to their wants. Corporate bankers have often lamented that the process of bidding for a mandate from big corps to be akin to a beauty parade.

At the parade, every major bank lines up to strut their wares but mostly, it boils down to how “cost-effective” one can get. It isn’t uncommon in the past to hear of banks pricing loss-making loans to first get their foot in the door and then, subsequently extract “franchise value”  from other transactions. Now, regulatory effects post-crisis require banks to rationalise their uses of capital (see previous post on Bank Capital after the Global Financial Crisis: “Collateral Damage” for SMEs). This partly accounts for the growing financialisation of corporate borrowing in the public debt market.

Evident from the analysis, small borrowers had no entry to the party. Why so?

In the traditional financial system, small borrowers are perpetual price-takers.

Small borrowers do not have the economies of scale to adequately remunerate bankers for organizing bond issuances.

Small borrowers are beholden to banks as their worthiness are subjected to the non-negotiable judgment of a steely credit department.

Small borrowers are given a “take it or leave it” proposition from banks with current unsecured effective rates of 12% – 20% p.a.

So it’s a Cinderella story and a Merchant of Venice tragedy for small borrowers:

  1. Small borrowers weren’t invited to the party.

  2. Modern “shylocks” charge rates that hurt.

Retail investors

Retail investors get a raw deal too. Most bonds are offered to “Accredited Investors” defined under S.4A of the Securities and Futures Act (Cap. 289), at a minimum investment of S$250,000. These are not issued with the retail investors in mind.

Occasionally, bonds have been issued for the retail investors, with friendlier bite size of S$1,000 or S$5,000. In 2012, only 2 issuers have done so – Capitamalls Asia and Genting Singapore Plc. Collectively, retail issuances amounted to S$2.7 billion, constituting only about 8.7% of total issuances. With our monthly median income at S$3,000, the majority had not been given the opportunity for a fixed income return.

Notwithstanding, the choices offered to retail investors also require further introspection. S$2.3 billion of retail issuances were by Genting Singapore. Although they were offered in retail lots, those issues were perpetuals – the most subordinated tranche after equity. Perpetual bondholders rank low in a company’s capital structure and would be one of the last to recover their capital if the issuer defaults. Technically, perpetuals are considered hybrid instruments (with both bond-like and equity-like characteristics), so they are not pure-play fixed income. Perpetual bond issuances saw a 200 plus per cent increase in 2012. This had garnered attention by the MAS. Well, we know where S$2.3 billion went to!

The takeaway: Retail investors, who comprise the majority, have little or no access to fixed income investments

Inclusive-ness for Fixed Income

In summary, I say…

Growth in the SGD bond markets did not benefit small business who are in the majority.

Small business and retail investors are under-served by our financial system.

I think a system should serve many and not the few.

What say you?