As one of the world’s top financial centres, Singapore runs with the best of the best often embracing best practice as it stays ahead of the rest. But when it comes to its bond market, it may need to take a step back and figure out how to make it better.

The Singapore dollar bond market is unusual because of one fact: most of its securities are unrated. As the Singapore economy slows and with the downturn in commodities, corporate default risks are on the rise. News headlines have recently mentioned the inability of corporates PT Trikomsel Oke and Pacific Andes Resources Development, two Singapore dollar bond issuers, to meet their bond repayments.

A fair question to ask is whether a culture of credit rating would be in the interest of the development of its bond market. With prevailing low rates, investors’ search for yield has drawn many to buy high-yield debt denominated in Singapore dollars. Perhaps there is that false sense of safety associated with investing in Singapore dollar bonds. Yet, because of the lack of credit rating, the Singapore bond market has attracted a myriad of issuers that probably would have attracted a junk bond rating.

 

“Previously, poor quality bonds were priced at tight spreads despite no rating as end investors were seeking yield,” relates a Singapore-based fund manager. “Now, secondary liquidity on some of these bonds has dried up as market makers were not able to bid for them.”

As part of the Asian Local Currency Bond Benchmark Review in the first half of this year, Asset Benchmark Research (ABR) asked institutional investors whether having more rated bonds would develop the local market. Fund managers who participated in the survey were resoundingly positive. They brought up several benefits that could be derived from having credit ratings attributed to these bonds.

Apart from increasing the investor base beyond private bank clients or insurance companies, investors would have higher comfort levels in the quality of the bonds. Also in the case of investors who had institutional mandates, the need for rating requirements would be fulfilled. In addition there would be better transparency as companies are more accountable for their actions. Market depth and liquidity would improve and a credit pricing mechanism would develop.

While positive, some respondents were also skeptical about credit ratings taking off. They argue that the Singapore dollar bond market is more retail-driven. As a consequence, investors care more about reputation, brand and even parental linkage. In fact, a large proportion of local corporates do not even intend to get a rating due to cost and fear of being penalized if the rating is not to what they expected.

“Many bonds in Singapore are not externally rated as there is a strong local bias,” states a portfolio manager at a global fund house. Another argues that despite the significance of credit ratings, education is more vital: “Retail investors need to be fully aware of the risks and investor education remains key to the development of the local bond market.”   

ABR’s annual survey probes into the product needs of fixed-income investors and the market penetration of banks active in Asian local currency bonds. To read more about Asset Benchmark Research, please click here.