Robson Lee, a partner in the legal firm of Shook Lin & Bok LLP, contributed this article to NextInsight. (2016 update: Robson Lee is presently a partner in Gibson Dunn & Crutcher LLP) 

INTRODUCTION 

Proposals have been unveiled to enhance retail access to the bonds market. 

On 1 September 2014, the Monetary Authority of Singapore (MAS) and the Singapore Exchange (SGX) separately released consultation papers seeking public feedback on these proposals. 

Bonds offered only to institutional and accredited investors, termedwholesale bonds, may be made available to retail investors if certain conditions are met under a Seasoning Framework. Separately, bond issuers with a strong credit profile may be exempted from the prospectus requirement. This may encourage more issuers to tap on the retail market.  

These proposals are further discussed below in this article

 

A.            PLAIN VANILLA BONDS

The proposals are currently confined to plain vanilla bonds, in the interest of investor protection.

Plain vanilla bonds are the most basic form of bonds. These are easily understood by retail investors, and regarded as safe investments offering fixed regular returns. 

The tenure of the bonds must not exceed 10 years. The principal must be fully repaid at maturity. The bonds can carry fixed or floating interest rates, with interest paid at regular intervals. Interest payments should not be deferrable. Plain vanilla bonds should not be subordinated, or convertible or exchangeable into shares or other securities. 

More complex bonds and debt securities, such as asset-backed securities or structured notes, are excluded from the proposals.  


250robsonleeRobson Lee specialises in corporate finance and capital markets transactions. He advises public listed companies on securities transactions, cross-border mergers and acquisitions and foreign joint ventures. File photo.
B.           SEASONING FRAMEWORK 

The Seasoning Framework is currently intended to apply only to wholesale bonds with an initial minimum principal amount of S$300 million.

There are two key conditions to satisfy: 

1.    The bonds must be issued by issuers who meet the prescribed eligibility criteria, such as a listing track record. 

2.    The bonds can only be purchased by retail investors after they are “seasoned”, that is, after the bonds are listed on SGX for at least six months.

These conditions serve to ensure that the bonds are sufficiently low-risk or safe for retail investors. Wholesale bonds that meet the two conditions are termedSeasoned Bonds.

Seasoning Eligibility Criteria

The issuer of Seasoned Bonds must be well established in terms of size, have a listing track record, and possess a good credit rating.

These three aspects are presented as eligibility tests: 

1.    Size Test.The issuer should have a market capitalisation of S$1 billion, or a net asset value of S$500 million. 

2.    Listing Test.The issuer has to be listed on SGX or a recognised securities exchange for at least 5 years. Alternatively, the issuer must have listed or guaranteed bonds on SGX for at least 5 years. 

3.    Credit Test.The issuer should possess a credit rating of at least BBB for itself or its bonds. The rating must come from an international credit rating agency. Alternatively, the issuer must have issued or guaranteed bonds on SGX of at least S$750 million over the last 5 years. At the minimum, the issuer should not have recorded a net loss within the last 5 years. 

As seen from above, the eligibility benchmarks are pegged at a high level. 

Issuers that are able to reach these benchmarks are likely to be government agencies and blue-chip companies. This gives retail investors the assurance that the Seasoned Bonds are likely to be low-risk, quality bonds. 

Seasoned Bonds are re-denominated into smaller lot sizes, possibly of 1,000 or around S$1,000 per lot. This makes them more affordable to retail investors. Bonds typically require a minimum investment of S$200,000 at the present. 

Re-Tap

Issuers of Seasoned Bonds will also be able to sell additional bonds to retail investors with the same terms without issuing a prospectus (Re-Tap). 

The Re-Tap is capped at 50% of the issue size of the existing Seasoned Bonds. 

To ensure that retail investors receive relevant up-to-date information relating to the Re-Tap, issuers will be required to provide a product highlights sheet. This sets out the key features and risks of the bonds in a clear and concise manner. 

The issue price, tenure, interest rate and listing status of the bonds would be presented. The product highlights sheet will also set out background information on the issuer and its historical financial performance. 

Offer documents given to institutional and accredited investors when the bonds were first offered, such as offering circulars, as well as the product highlights sheet to be provided to retail investors at Re-Taps, must be lodged with SGX and made available on SGX’s website. Retail investors are thus given sufficient relevant information to make an informed investment choice.  


C.           
PROSPECTUS EXEMPTION FOR EXEMPT BOND ISSUERS

The Seasoning Framework operates at the secondary markets level by making available existing wholesale bonds to retail investors. 

At the primary markets level, MAS is proposing a prospectus exemption for qualifying issuers (Exempt Bond Issuers). This provides retail investors with more opportunities to subscribe directly to bonds issued by issuers which possess a strong credit profile. 

Currently, any offer of securities, including bonds, to retail investors must be accompanied by a prospectus registered by MAS unless exempted. 

The qualifying criteria will comprise the Seasoning Eligibility Criteria, but with higher thresholds for the Credit Test. 

An Exempt Bond Issuer should possess a credit rating of at least AA- (instead of BBB under the Seasoning Framework) for itself or its bonds. Alternatively, the issuer must have issued or guaranteed bonds on SGX of at least S$1 billion (instead of S$750 million under the Seasoning Framework) over the last 5 years. 

Exempt Bond Issuers can invite subscriptions for bonds via ATMs or brokerage firms. These distribution channels are familiar to retail investors given their use in Initial Public Offers. 

Bonds issued by Exempt Bond Issuers must be listed and traded on SGX to provide retail investors with a ready market to trade the same. For parity, the offer has to be made to both retail investors as well as institutional and accredited investors. This will also enlarge the pool of would-be purchasers for such bonds. 

Exempt Bond Issuers will be required to provide a simplified disclosure document, in lieu of a prospectus. This document provides investors with sufficient information to assess the offer. It will contain, at a minimum, information generally disclosed for an offer of bonds made to institutional and accredited investors.

Similar to the Seasoning Framework, there will be a product highlights sheet made available to investors. The simplified disclosure document and product highlights sheet must be lodged with SGX and made available on SGX’s website for easy access. 

D.             CONCLUSION

The proposals, upon implementation, heralds a welcomed and positive development for the bonds market. Retail investors can look forward to more choices when it comes to diversifying their investment portfolios. They would also be able to access relatively safe investments which are previously available only to institutional and accredited investors. Bond issuers, on the other hand, can look forward to tapping on the retail market as an alternative source of funding.

This article provides general information only and does not constitute legal advice. Readers are advised to seek specific legal advice in relation to any decision or course of action.

The Chinese version of this article is here. 

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