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Singapore’s rapidly ageing population has resulted in a growing clamour for investments offering a safe and steady stream of income deep into old age.

Thanks to better health care, Singaporeans are now living well into their 80s and beyond.

But the dilemma for regulators has always been how to protect the interests of small investors while allowing companies to tap funds directly from them.

So, it is gratifying to note that the Monetary Authority of Singapore (MAS) and the Singapore Exchange (SGX) are finally tackling the problem head-on. Last week, they unveiled a series of proposals to make it easier for retail investors to buy bonds.

One key change is to let eligible firms — those graded AA- or higher by an international credit-rating agency such as Moody’s or Fitch — do away with the need to issue prospectuses in order to do bond offerings for retail investors.

Another proposal is to allow some bonds, rated BBB or better, and which have been traded for at least six months, as they become seasoned — to use the industry lingo — to be broken up into smaller board lot sizes of 1,000, or about $1,000 a lot.

This is far more affordable for ordinary investors than their original lot price of $250,000, aimed at sophisticated investors such as pension funds.

To avoid disappointing retail investors eager to get a shot at buying the seasoned bonds, issuers can issue more of the bonds, as they are given the option to raise more funds for up to 50 per cent of the original bond size without having to put out a prospectus.

And to make sure that the bonds get to retail investors, these companies can revisit the market in this way only via ATMs and placements with brokerages — the two channels used to sell shares for initial public offerings.

At first glance, there seems to be little to quarrel with over the proposals, which provide a much needed and long overdue overhaul of the way bonds are sold to retail investors.

MAS is to be applauded for the emphasis it has placed on simplifying the disclosures an eligible corporate issuer has to make if it wants to revisit the market for funds.

Rather than requiring them to produce a lengthy document, the MAS is confining issuers to issuing a pamphlet, not exceeding eight pages, to flag the key features and risks of the bonds.

This is a contrast from the complicated prospectuses issued by IPO aspirants — sometimes heftier than the Yellow Pages — that can be a big turn-off for any investor who may want to read them.

But one concern voiced by traders is whether MAS has set the bar too high in its regulatory overhaul of the bond market, making it impossible for all but the highest-grade bonds to reach retail investors.

That means that the payout on such bonds may not be much higher than, say, the 2.35 per cent coupon which a 10-year Singapore Government bond enjoys.

True, bond investing is not without risks. An investor’s bond holdings can go up in smoke if the company goes belly up. Bond investing is also likely to attract a more risk-averse breed of investors, such as the retiree looking for a safe and steady income stream or a family saving up for the children’s college education.

But the tough eligibility criteria being proposed mean only government bodies such as the Housing Board and the bluest of the blue-chip firms such as banks will be able to get the green light.

Even then, their offerings are confined only to plain vanilla bonds even if they meet all of MAS’ other stringent criteria. If they want to issue perpetual bonds or convertible bonds, the current rules, such as issuing a prospectus, still apply.

Would it be worthwhile to widen the proposed eligibility criteria?

Take, for example, OCBC Bank. When it tapped the market in 2008 for $1 billion by issuing preference shares that offered a 5.1 per cent coupon, it managed to attract more than $4 billion in subscription monies from retail investors in just 24 hours, even though the global financial crisis was then at its height.

Granted, preference shares are riskier than vanilla bonds. This is because unlike vanilla bonds, whose interest must be paid according to a fixed schedule, preference shares allow an issuer to defer or even forgo a coupon payment without defaulting on its debt obligations. The principal repayment is also left to the issuer’s discretion.

But as seasoned investors have observed, lenders such as OCBC are proxies to the Singapore economy. It would be unthinkable for the bank to skip even one interest payment, as the consequences for the wider economy would be quite devastating.

Five years later, after making its regular coupon payments without a hitch, OCBC retired the debt and paid off holders of the preference shares.

In highlighting this example, one may well conclude that most retail investors are savvier than what they have been made out to be.

And given the caveat emptor or buyer beware regime that has been operating in the stock market for the past decade, they are probably adept at doing their sums and weighing the risks.

So, setting the bar too high will only be detrimental to nurturing a vibrant bond market for retail investors.

An important consideration is to provide safeguards to ensure that complicated derivatives products, such as the ill-fated Lehman Brothers Minibonds, do not make their way to the market and give investors the mistaken impression that they are bonds.

As it is, many retail investors hold out hope of buying bonds of the blue-chip firms in which they are already shareholders. Can buying bonds — other than the vanilla vintage proposed — be any riskier than the blue-chip shares which they hold?

This article was first published on September 08, 2014.

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