15-05-2012, 07:22 AM
I think many retail investors are unaware of the risks of "perps". My stand is if I don't understand the company well enough, I'll avoid everything it issues!
The Straits Times
May 15, 2012
MAS 'worried' by perpetual bond rush
Concern that retail investors may take on too much risk
THE unprecedented run of perpetual bond sales in Singapore has caught the attention of the regulators.
The Monetary Authority of Singapore (MAS) is growing concerned about the number of potentially risky bonds that have ended up in the hands of individual investors.
Bankers said MAS officials had voiced their concerns over retail holdings of perpetual bonds during at least two informal meetings in recent weeks.
The central bank's scrutiny is preliminary, and there is no suggestion of any wrongdoing on the part of the banks or companies involved in the recent flurry of perpetual bond issues.
But the discussions show the regulator is worried that individual investors may be taking on too much risk - or buying securities without a full understanding of the product.
More perpetual bonds were sold here in the first three months of this year than in the previous decade and a half.
The product offers companies the tantalising opportunity to raise funds with no dated maturity, typically winning some equity treatment under accounting rules and avoiding any impact on gearing ratios.
The higher coupons are attractive for investors in a low interest-rate environment, but the notes come with high duration risk since there is no guarantee of repayment.
Companies including Singapore Post, Mapletree Logistics Trust and Olam International sold perpetual bonds earlier this year, lifting perpetual sales to $3.1 billion in the first quarter.
A large proportion of those deals went to private banks, investing on behalf of individual clients.
MAS' focus, however, has sharpened since Genting Singapore offered $500 million to the public, giving the retail public the chance to invest via the automated teller machines of Singapore's local banks.
The retail offering was only the second such offering of perpetuals, with Hyflux being the first to do so when it launched the first corporate perpetual issue in April last year.
The problem with buying products through ATMs is that, unlike with stocks or other structured investment products sold over the counter, investors have no access to advisory services that can point out risks.
Retail investors are supposed to read the prospectus, but in practical terms no arranger can guarantee that they have done so.
For the moment, bankers said they have not been told to pull back from retail offerings of perpetuals, nor have they heard of any suggestion that MAS would be making recommendations for selling agents to protect investors in such sales.
But the chatter that the central bank is keeping an eye on the retail market may prompt underwriters to take a more cautious approach on any future retail offering.
'I won't be surprised if MAS would be watching the developments in this space, as it has always been careful with products that are sold to the public,' said one local banker.
The MAS has been extremely cautious on the sales of structured investment products ever since the Lehman structured products collapsed in the global financial crisis. That episode, which caused a huge public outcry, saw 8,000 individual investors, including retirees, losing a chunk of a combined $508 million of investments in Lehman-linked structured notes from nine banks and brokerages in Singapore.
Since then, the central bank has put in place several policies that have increased investor protection.
'After the Lehman debacle, I don't think MAS can afford to drop another ball,' said another local banker. 'So, it is only right that it should watch that retail investors are protected in the perpetual offerings. There are, after all, a lot of risks in such instruments.'
Compared with straight vanilla bonds, perpetual securities often allow coupon deferrals, although this usually means the issuer also cannot declare dividends, and some include non-cumulative features as well.
And, as the name suggests, the bonds are perpetual and issuers have the right not to exercise a call option, which means investors may not see the return of their principal investment.
The critical point for retail investors is that they have no recourse if the issuer decides not to call. This risk is all too real, as events in the United States over the past two weeks have showed. Well-known US banks JP Morgan and Bank of America decided against making their respective calls on their Lower Tier 2 bonds, raising the ire of bondholders who had traded the paper as five-year notes.
Any similar development in the Singapore perpetual paper in four to five years' time will have a rippling effect on other outstanding perpetuals.
Local bankers said the risks have been escalated because private bankers, the main takers of the recent perps, were buying on the margin - sometimes using leverage granted by the lead managers themselves.
Some purchases were done on 100 per cent margins, said one foreign banker.
The MAS' concerns come amid talk that more Singapore and foreign issuers are exploring perpetual bond sales - although most are expected to target the institutional market.
Hong Kong conglomerate Hutchison Whampoa has been repeatedly linked with a return to the Singapore debt market, and local conglomerate Keppel Corp was heard to be hunting for arrangers for a perpetual.
Keppel, however, is said to have demanded hard underwritten bids, and bankers - worried that the market is already full - may be reluctant to stick their necks out that much.
REUTERS
The Straits Times
May 15, 2012
MAS 'worried' by perpetual bond rush
Concern that retail investors may take on too much risk
THE unprecedented run of perpetual bond sales in Singapore has caught the attention of the regulators.
The Monetary Authority of Singapore (MAS) is growing concerned about the number of potentially risky bonds that have ended up in the hands of individual investors.
Bankers said MAS officials had voiced their concerns over retail holdings of perpetual bonds during at least two informal meetings in recent weeks.
The central bank's scrutiny is preliminary, and there is no suggestion of any wrongdoing on the part of the banks or companies involved in the recent flurry of perpetual bond issues.
But the discussions show the regulator is worried that individual investors may be taking on too much risk - or buying securities without a full understanding of the product.
More perpetual bonds were sold here in the first three months of this year than in the previous decade and a half.
The product offers companies the tantalising opportunity to raise funds with no dated maturity, typically winning some equity treatment under accounting rules and avoiding any impact on gearing ratios.
The higher coupons are attractive for investors in a low interest-rate environment, but the notes come with high duration risk since there is no guarantee of repayment.
Companies including Singapore Post, Mapletree Logistics Trust and Olam International sold perpetual bonds earlier this year, lifting perpetual sales to $3.1 billion in the first quarter.
A large proportion of those deals went to private banks, investing on behalf of individual clients.
MAS' focus, however, has sharpened since Genting Singapore offered $500 million to the public, giving the retail public the chance to invest via the automated teller machines of Singapore's local banks.
The retail offering was only the second such offering of perpetuals, with Hyflux being the first to do so when it launched the first corporate perpetual issue in April last year.
The problem with buying products through ATMs is that, unlike with stocks or other structured investment products sold over the counter, investors have no access to advisory services that can point out risks.
Retail investors are supposed to read the prospectus, but in practical terms no arranger can guarantee that they have done so.
For the moment, bankers said they have not been told to pull back from retail offerings of perpetuals, nor have they heard of any suggestion that MAS would be making recommendations for selling agents to protect investors in such sales.
But the chatter that the central bank is keeping an eye on the retail market may prompt underwriters to take a more cautious approach on any future retail offering.
'I won't be surprised if MAS would be watching the developments in this space, as it has always been careful with products that are sold to the public,' said one local banker.
The MAS has been extremely cautious on the sales of structured investment products ever since the Lehman structured products collapsed in the global financial crisis. That episode, which caused a huge public outcry, saw 8,000 individual investors, including retirees, losing a chunk of a combined $508 million of investments in Lehman-linked structured notes from nine banks and brokerages in Singapore.
Since then, the central bank has put in place several policies that have increased investor protection.
'After the Lehman debacle, I don't think MAS can afford to drop another ball,' said another local banker. 'So, it is only right that it should watch that retail investors are protected in the perpetual offerings. There are, after all, a lot of risks in such instruments.'
Compared with straight vanilla bonds, perpetual securities often allow coupon deferrals, although this usually means the issuer also cannot declare dividends, and some include non-cumulative features as well.
And, as the name suggests, the bonds are perpetual and issuers have the right not to exercise a call option, which means investors may not see the return of their principal investment.
The critical point for retail investors is that they have no recourse if the issuer decides not to call. This risk is all too real, as events in the United States over the past two weeks have showed. Well-known US banks JP Morgan and Bank of America decided against making their respective calls on their Lower Tier 2 bonds, raising the ire of bondholders who had traded the paper as five-year notes.
Any similar development in the Singapore perpetual paper in four to five years' time will have a rippling effect on other outstanding perpetuals.
Local bankers said the risks have been escalated because private bankers, the main takers of the recent perps, were buying on the margin - sometimes using leverage granted by the lead managers themselves.
Some purchases were done on 100 per cent margins, said one foreign banker.
The MAS' concerns come amid talk that more Singapore and foreign issuers are exploring perpetual bond sales - although most are expected to target the institutional market.
Hong Kong conglomerate Hutchison Whampoa has been repeatedly linked with a return to the Singapore debt market, and local conglomerate Keppel Corp was heard to be hunting for arrangers for a perpetual.
Keppel, however, is said to have demanded hard underwritten bids, and bankers - worried that the market is already full - may be reluctant to stick their necks out that much.
REUTERS