Response to two letters on retail bonds, “MAS has been doing its part but investors must exercise care” – The Straits Times, 5 and 13 April 2019

We thank Dr Jeremy Teo Chin Ghee (Timely to encourage retail bond market, April 5) and Mr Alfred Chan Hock Yuen (Take extra step to help laymen with investment decisions, April 13) for their useful suggestions.

Dr Teo suggested that the Monetary Authority of Singapore (MAS) encourage the offering of retail bonds. MAS has indeed been doing so. In 2016, MAS introduced two frameworks to make it easier for eligible corporations to offer bonds to retail investors.

The retail bonds by Temasek and Singapore Airlines were issued under these frameworks. But even when investing in bonds, investors must exercise care as the credit profiles of bond issuers can vary greatly. Investors should look beyond yield or name-familiarity and seek to understand the issuer’s financial strength before committing to investments.

Mr Chan suggested that credit ratings be made mandatory for bonds issued to retail investors.

There are pros and cons to doing this. One downside is that some issuers may choose to simply tap institutional investors; this limits the range of bond issues available to retail investors.

So, instead of making ratings mandatory, MAS introduced a grant scheme in 2017 to encourage and incentivise issuers to offer rated bonds. It is early days yet, but the scheme has attracted some interest.

Dr Teo suggested tightening regulations around the issuance of perpetual securities and preference shares in favour of bonds. While perpetual securities and preference shares offer investors less protection than bonds in a liquidation scenario, they rank above ordinary shares which retail investors can freely invest in. Restricting them would limit the choice available to retail investors and cause unintended effects – for example, an investor may choose to invest in equities instead and take on even more risk.

Ultimately, the best way to help investors is to enable them to make informed investment decisions by requiring issuers to disclose material information.

MAS requires issuers to set out clearly in their offering documents their financial position and prospects as well as key risks and salient terms of the instruments offered. In addition, to help investors better understand disclosures, MAS has required issuers to furnish in a product highlight sheet (PHS) a summary of key information in easy-to-understand language.

We are looking into further strengthening the format and content of the PHS and welcome feedback on this.

Source; Monetary Authority of Singapore