Singapore takes aim at unrated bonds

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(June 27): Singapore's capital markets are set for more rated bond issues as the city's regulator considers ways to promote transparency and deepen the business.

The Monetary Authority of Singapore has raised the issue in recent discussions with market participants, according to multiple sources.

Although there is no suggestion that ratings will be compulsory, the discussions point to regulators' concerns that the prevalence of unrated debt is decreasing transparency and hurting liquidity.

"The central bank is working with the industry to encourage ratings of corporate debt, but that does not mean or end in a mandatory requirement," said one source closely following the process.

"The key word here is 'encourage'. Ultimately, it is up to the issuers to decide if they want to get rated or not."

Singapore has considered a rating requirement for corporate bonds to help protect investors in the past, but bankers and issuers have strongly resisted such proposals.

Local investors have been happy to buy unrated bonds on the strength of a company's brand or its government links, while the unrated format saves issuers transaction costs, helping attract some smaller companies to the capital markets.

However, the looming introduction of global capital and liquidity standards for insurance companies has prompted the MAS to revisit the contentious issue.

At the moment, unrated bonds attract the same risk charges as non-investment grade debt under the risk-based capital framework for insurers. Insurance fund managers have asked the MAS to reconsider that rule, which they say will stop them from buying bonds from financially strong issuers.

Singapore's insurers hold about 20% of the city's stock of corporate bonds, mostly in the form of unrated securities from government-linked companies and statutory boards. Housing and Development Board, the largest local issuer other than the government, has no rating.

Additional cost?

The regulator believes the wider use of credit ratings will help soften the impact of new capital rules for the insurance sector, while enhancing corporate disclosure and transparency to benefit other investors ultimately.

Bankers, however, are worried that regulatory pressure to get a rating will stop some companies from coming to market. Small-cap issuers have been especially active in the bond market in recent months.

"A number of Singapore issuers enjoy brand and name recognition, which keeps their bond yields low, but they fear that they may get a lower rating and that will increase their funding costs," said one credit analyst.

In a similar vein, larger companies are also reluctant to be rated.

"If the issuers think that rating cost will add to their overall cost, they can simply turn back to the loans market," said a head of DCM origination. "MAS has to come out with some incentives, tax breaks, for instance, to offset the additional costs."

Rating agencies, however, argue that the benefits of a rating often outweigh the cost.

"The cost of obtaining a rating is not a key concern for most issuers. It's being ready and willing to go through the rating process and the market discipline that comes with it. Rated issues in most developed markets have saved issuers as much as 50bp," said Surinder Kathpalia, managing director, head of ASEAN and South Asia at Standard & Poor's.

"Ratings enhance transparency in the marketplace, provide a useful benchmark for credit differentiation and may provide issuers access to a wider investor base," said Kathpalia. "That wider investor base can often be helpful in tighter pricing that some issuers seek."

Opposite direction

Unlike other ASEAN countries, Singapore has no requirement for bond issues to be rated. Thailand and Malaysia, for example, insist on credit ratings to increase disclosure in order to protect investors. Both countries, however, are gradually moving away from the mandatory rating rule.

Malaysia recently announced that it would allow unrated bonds to trade from 2017 to broaden the market and attract retail investors. Thailand is also moving in that direction, after the central bank noted strong demand for two unrated sovereign issues from neighbouring Laos.

The push for more rated offerings in Singapore appears to come from foreign banks and investors. There are a number of rated issuers in the city state, most of them being the REITs and the larger corporations, as well as some government-linked corporations.

"We are encouraging the statutory boards to get rated, and that will help expand the investor base in Singapore to an international audience," said one buy-side investor. "I know the local investors don't care for the ratings, but it will help build up the base. Otherwise, the local base will just not grow."

HDB may be an obvious candidate to benefit from a rating. The need to fund an expansion of public housing has forced it to increase yields to attract buyers already quite full on its paper. Foreign bankers have argued that a rating will allow global investors to buy the paper, considered as a proxy for the Singapore Government.

Ultimately, investors cannot assume more ratings will reduce the chances of a default. "In the end, ratings are not a substitute for investors doing their own homework," said Kathpalia.