On 1 September 2014, the Monetary Authority of Singapore (MAS) and the Singapore Exchange (SGX) issued consultation papers to seek comments on proposals to facilitate access to debt securities for retail investors in Singapore.
Currently, retail investors in Singapore are only able to purchase debt securities in an offering that is accompanied by a prospectus registered with the MAS or, if an issuer has shares already listed on the SGX, an offer information statement lodged with the MAS. Offers of debt securities in Singapore that are not accompanied by such documents are restricted to institutional and accredited investors only and are generally not available to retail investors.
To improve access to debt securities for retail investors in Singapore, the MAS and SGX are making two proposals that would apply to plain vanilla bonds as follows:
Seasoning Framework – to allow an issuer’s bonds that were originally offered to institutional and accredited investors to be re-denominated into smaller lot sizes for trading after a seasoning period of six months, and allow an issuer to offer new bonds to retail investors with the same terms such that the new bonds are fungible with the seasoned bonds (a tap); and
Exempt Bond Issuers Framework – to allow eligible issuers to offer bonds to retail investors in Singapore without the requirement for a prospectus or an offer information statement.
PLAIN VANILLA BONDS
Only plain vanilla bonds will be covered by both frameworks. Plain vanilla bonds are proposed to be those which:
have a fixed term not exceeding 10 years;
provide for bullet repayment upon maturity;
accrue periodic interest that cannot be deferred;
interest is either fixed or floating (based on a reference rate plus a fixed margin that cannot be decreased);
are not convertible into or exchangeable for other securities;
are not asset-backed securities or structured notes; and
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The scope excludes convertible bonds, exchangeable bonds, perpetual bonds and other hybrid instruments.
Under the proposed Seasoning Framework, wholesale bonds of eligible issuers with an initial principal amount of S$300.0 million that are initially offered to institutional and accredited investors in larger denominations of at least S$200,000 will be able to be resized into smaller denominations and traded in smaller board lot sizes of S$1,000 after a six-month seasoning period, thereby becoming “seasoned bonds”. In addition, eligible issuers have the option to do a tap of such seasoned bonds and offer to retail investors up to 50% of the original issue size. The tap can take place in one or more tranches at any time during the tenor of the seasoned bonds, either through subscription via ATMs or placements via brokerage firms.
Eligible issuers are those who satisfy three eligibility criteria, namely, the Size Test, the Listing Test and the Credit Test. See “Proposed Seasoning Framework Eligibility Criteria” below for details. An issuer who is relying on a guarantor to satisfy these criteria must be a wholly owned entity of the guarantor. Under the proposal, the eligibility criteria must be satisfied (a) at the time of its initial application for the listing of the bonds (b) prior to the transfer of trading of the seasoned bonds from the SGX wholesale bond market to the SGX Mainboard and (c) at the time each tap is made available to retail investors. Prior to the completion of the seasoning period, the SGX will assess the issuer for compliance with the Seasoning Framework and suitability for seasoning.
Proposed Seasoning Framework Eligibility Criteria
Size Test. Satisfied in one of two ways: (a) having a market capitalisation of at least S$1.0 billion over the last 180 market days prior to the date of the application to list the bonds; or (b) having a net asset value of at least S$500.0 million in its most recent audited annual financial statements and an annual average net asset value of at least S$500.0 million for its three most recent audited annual financial statements.
Listing Test. Satisfied in one of two ways: (a) having listed equity securities listed on the SGX or a recognised securities exchange for at least five years, or (b) having listed, or guaranteed the issuance of, bonds listed on the SGX for at least five years.
Credit Test. Satisfied in one of three ways: (a) no net loss over the five years prior to the initial listing of the bonds to be seasoned; (b) having a credit rating of BBB or higher, or the bonds to be offered
In addition, if the issuer decides to do a tap, it must make another announcement that must include the terms of the tap. The issuer must also provide retail investors with a Product Highlights Sheet and, if relevant, updated or supplemental disclosure documents. The MAS has proposed that the Product Highlights Sheet be limited to eight pages and to contain certain prescribed information. Details of the form and content requirements are in Annex A of the MASs’ consultation paper.
EXEMPT BOND ISSUERS FRAMEWORK
From the retail investor’s perspective, the Seasoning Framework applies only to bonds sold on the secondary market or subsequent taps. To provide retail investors with more opportunities to subscribe directly, the MAS has proposed the Exempt Bond Issuers Framework to allow issuers with a stronger credit profile and who meet the eligibility criteria to issue bonds without a prospectus (Exempt Bond Issuers).
Bonds issued by Exempt Bond Issuers will be required to be listed and traded on the SGX, the offer must comprise tranches to both institutional/accredited investors and retail investors, and subscription of the bonds may be made via ATMs or brokerage firms. Exempt Bond Issuers must also comply with the existing Listing Rule 308 for trustee and trust deed requirements of retail debt issues listed on the SGX.
Exempt Bond Issuer Eligibility Criteria
The MAS has proposed the following criteria for an issuer to be an Exempt Bond Issuer:
Size Test. Same as for the Seasoning Framework.
Listing Test. Same as for the Seasoning Framework.
Credit Test. Unlike the Seasoning Framework, the Credit Test to be an Exempt Bond Issuer is stricter. An issuer may satisfy the Credit Test in one of two ways: (a) having a credit rating of AA- or higher, or the bonds to be offered are rated AA- or higher, by an international credit rating agency; or (b) having listed, or guaranteed the issuance of, bonds listed on the SGX of at least S$1.0 billion (or its equivalent in other currencies) over the prior five years.
Exempt Bond Issuers will be required to provide a Simplified Disclosure Document instead of the prospectus. The MAS expects the Simplified Disclosure Document to contain, as a minimum, information generally disclosed for an offer of bonds make to institutional and accredited investors, and such disclosure must be given to both the institutional/accredited investors and the retail investors.
To ensure that baseline disclosure standards are met, the MAS has proposed certain broad-level content requirements for the Simplified Disclosure Documents. In addition, Exempt Bond Issuers will also be required to provide a Products Highlights Sheet to retail investors, similar to the Seasoning Framework. Both the Simplified Disclosure Document and the Products Highlights Sheet must be lodged with the SGX and made available to investors on the SGX’s website. The full description of the proposed form and content requirements of the Simplified Disclosure Document can be found in Annex B of the MAS’s consultation paper.
The proposals by the MAS and the SGX in relation to both frameworks are a laudable and an understandable response in an effort to balance (a) increasing demands from retail investors to be able to invest in more fixed income securities, (b) making it less onerous to issuers to sell bonds to retail investors and (c) investor protection.
However, while there are a large number of listings on the wholesale market of the SGX, we believe only a small number of existing issuers will be in a position to avail itself of either the Seasoning Framework or the Exempt Bond Issuer Framework for future bond issues. We believe that the only issuers who realistically will be interested in doing so are those incorporated in Singapore or have shares listed on the SGX for the following reasons:
Securities Laws of Other Jurisdictions. Many issuers typically sell their bonds not just in Singapore but also in various other jurisdictions pursuant to exemptions from public offering or registration requirements in such jurisdictions. To rely on such exemptions, such issuers would typically have to limit its bond offering to institutional and accredited investors and, to demonstrate who the offering is target at, denomination amounts are typically set very high. Therefore, it may not always be advisable or possible for issuers to issue or re-denominate bonds in low denomination amounts that are suitable for retail investors.
Currency of Bonds. A substantial majority of the bonds that are listed on the SGX, particularly those issued by foreign issuers, are denominated in U.S. dollars rather than Singapore dollars. It remains to be seen whether retail investors in Singapore are willing to take foreign exchange risk to purchase non-Singapore dollar bonds.
Clearing Systems. Many of the bonds that are issued by foreign issuers and listed on the SGX are typically cleared through clearing systems other than Singapore’s CDP, principally Euroclear, Clearstream, Luxembourg and DTC. It is unlikely that retail investors in Singapore will have accounts in clearing systems outside Singapore to hold such bonds. This hurdle does not apply to issuers with shares listed on the SGX because these shares are already cleared through CDP.
In addition, we believe that the potential pool of Singapore-incorporated or SGX-listed issuers who will be able to avail itself of either the Seasoning Framework or the Exempt Bond Issuer Framework will be further limited because only a limited number of such issuers will be able to pass the Size Test, the Listing Test and the Credit Test (the last of which is also more stringent in relation to the Exempt Bond Issuer Framework).
Another important aspect that may result in eligible issuers not wanting to avail itself of the Seasoning Framework or the Exempt Bond Issuer Framework could be the more stringent trust deed requirements that would not apply to bond offerings directed only at institutional or accredited investors. This is particularly applicable to highly rated, well-known issuers with large market capitalisations, who may have the ability to successfully sell bonds to institutional or accredited investors internationally and in Singapore without having to agree to any covenant other than a negative pledge. Currently, the trust deeds of such offerings may not contain any limitation on the amount that the issuer may borrow or any covenant requiring, upon written request of the trustee, the issuer to cause its wholly owned subsidiaries to become guarantors, and the reports that are required to be sent to trustees may not need to cover all of the prescribed requirements. Since bonds issued by these types of issuers are precisely the ones that are more suitable for retail investors, our hope is that the proposed trust deed requirements will (as a result of the consultation) not apply to the Seasoning Framework or the Exempt Bond Issuer Framework in order not to dissuade such issuers from making available their bonds to retail holders.
The consultation period for both consultation papers expired on 30 September 2014, and the proposals described above may therefore be amended. More importantly, it remains to be seen how receptive issuers are to these proposals and whether these proposals will translate into any meaningful increase in the number of bond issues in which retail investors can invest.