Singapore’s corporate bonds’ default rate has hit more than 2.6%, relative to the historical default rates in the United States 

I refer to the article “DBS is the leading bookrunner for companies which defaulted on Singdollar bonds” (theonlinecitizen, Jul 14).

It states that “According to a Business Times report today (‘Insolvency limbo: the SGD bond market‘, 14 Jul), the Singdollar bond market is grappling with an unprecedented number of insolvencies.

Data compiled by BT shows that since Nov 2015, at least 13 issuers have defaulted on a total of 23 Singdollar bonds by missing coupon payments, failing to repay note holders at maturity, filing for judicial management, filing for bankruptcy protection and in one case breaching a financial covenant.”

As to “It represents S$3.2 billion in face value of Singdollar bonds and perpetual securities rocked by defaults, or 2.6 per cent of the S$123 billion outstanding Singdollar corporate bonds, which also include government agencies and statutory boards” – what is the default rate, if we exclude the bonds issued by Singapore “government agencies and statutory boards”?

In this connection, I understand that bond default rates are typically calculated separately for corporate bonds and government or municipal bonds.

In this regard, “Default rates have been quite low in the corporate bond market over time, averaging 1.47% of all outstanding issues in the 32-year period measured. Investment grade bonds defaulted at a rate of just 0.10% per year, while the default rate for below-investment-grade (high yield) bonds was 4.22%.

• The vast majority of defaults have occurred among the lowest-rated issuers. The 31-year average for securities rated AAA (the highest rating) and AA were 0.0% and 0.2%, respectively” (“Default Rates and Bonds“, www.thebalance.com, Apr 20, 2017)
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“Among the 13 defaulters, 10 continue to remain stuck in various stages of restructuring while two have been liquidated. Interestingly, from the data compiled by BT, it shows that DBS is the leading bookrunner or underwriter of 11 out of the 13 bond defaulters, including 1 which was liquidated.

When asked if the bank has taken steps to improve disclosures during the bond IPO process since then, Clifford Lee, head of fixed income at DBS, gave a run-of-the-mill reply, “DBS has consistently through the years, applied best practice disclosure standards used in international offerings for its bond deals across markets, including the Singdollar bond market.”

“This entails making applicable business and risks disclosures in offering documents, together with financial disclosures from audited and/or reviewed financials,” he said.”

With regard to “In some cases like Hyflux, they even issued such risky corporate perpetuals in small denominations to the man in the street, allowing Ah Pek and Ah Ma to buy them through ATMs.

In any case, all the investors are easily “sold” by the high yields dangling in front of them especially with the low interest rate regime operating in the last number of years. But now, the credit cycle has peaked, turning some of the high-yield instruments into “junk bonds”.

BT reported that in addition to the so-called “accredited investors” facing losses, more than 20,000 non-accredited mom-and-pop investors have been hit” – Temasek Holdings launched its first retail private equity bond last month.

“A portion of the retail bonds was offered to retail investors for subscription via ATMs with a minimum investment of S$2,000”.

I understand that private equity is arguably, the riskiest among the major asset classes (private equity, equities, property, commodities, bonds).

According to investopedia – “What is ‘Private Equity’

Private equity is capital that is not listed on a public exchange. Private equity is composed of funds and investors that directly invest in private companies, or that engage in buyouts of public companies, resulting in the delisting of public equity. Institutional and retail investors provide the capital for private equity, and the capital can be utilized to fund new technology, make acquisitions, expand working capital, and to bolster and solidify a balance sheet.”

“Overall, the risk profile of private equity investment is higher than that of other asset classes, but the returns have the potential to be notably higher.”

At its worse point (from the previous high in 2007) in the last financial crisis (2008/2009) – I understand that the average loss for private equity was about 80 per cent and many private equity funds went into liquidation.

Leong Sze Hian