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Defaults show weak points in Singapore bond market
Published: 5:20 PM, November 8, 2016
HONG KONG — A recent spate of defaults in the Singapore bond market has triggered calls for a reform of the Reublic’s depository system, which makes it harder for bondholders to enforce their rights than in the global market.
Investors have struggled to demand immediate repayment from issuers in default, and many have blamed trustees for seemingly delaying the process.
Holders of Swissco Holdings’ S$100 million bonds, on which a S$2.9 million Oct 16 coupon payment remains unpaid, wrote to the Monetary Authority of Singapore last month to complain that “the notes trustee does not seem to have an established process for noteholder verification that works”, according to a letter seen by IFR. The trustee is DB International Trust (Singapore), a unit of Deutsche Bank.
Much of the delay comes from efforts to verify that those demanding an acceleration of payment are really bondholders, and that part of the process has proved to be a bottleneck. Trustees do not keep names of bondholders, so they have to request them from the bond depository, which in Singapore is the Central Depository (CDP), under the Singapore Exchange.
“The manner in which the CDP system is set up can cause some additional complexities,” said Mr Andy Ferris, a partner at Hogan Lovells Lee & Lee. “For example, the trustee may have difficulty obtaining the list of bondholders from CDP, which can make verifying holders’ positions difficult. Only the issuer is seemingly entitled to that list on request.”
This differs from the process for international bonds, in which it is more straightforward for trustees to verify bondholder information.
“Euroclear or Clearstream can provide a statement of account for the purpose of proving holdings and custodians can provide holdings information via SWIFT. That streamlines the verification process,” said Mr Ferris.
Market sources said the CDP had changed its stance in recent weeks, and indicated that it could disclose bondholder lists to trustees if they could show good cause for requiring it, and pay a fee.
“The bond trustee is authorised under the trust deed agreement between bondholders and the bond issuer to obtain the list of bondholders from CDP,” said a spokesperson for CDP. “A bond trustee can do so by producing the trust deed to CDP. Upon verification of the bond trustee as identified in the trust deed, CDP will release the list of bondholders as at a specific date within two business days.”
MANUAL MESSAGES
It may take only two days to obtain the list of registered bondholders, but that is only part of the story. Some bonds are held in nominee accounts, meaning that there could be several layers of ownership.
In the global markets, an electronic message can be sent through Euroclear or Clearstream to reach all of the banks involved in the network of holdings. The last one in the chain then sends the details of the beneficial owner to the trustee.
In the Singapore bond market, every step of that process has to be performed manually. That means the trustee needs to contact every bank involved, until it obtains details of the ultimate owner of each bond, which means it can take more than a week to identify bondholders, according to market sources.
The situation has been complicated by the investor base, with some high-yielding Singapore dollar bonds held by more than 100 individual investors and no institutions.
With relatively limited resources, such investors are less willing to pay financial advisers to represent their interests, or to pre-fund and indemnify trustees who take action on their behalf. It is also practically impossible for bondholders to team up with other holders of the same notes, since only the trustee has a means of identifying the owners. Nor do the terms of the usual trustee deed allow a trustee to arrange a meeting of bondholders unless there is a specific resolution to be discussed, and it cannot give preferential treatment, like individual meetings, to any particular bondholder.
DEFAULT RISKS
Some investors have shown themselves to be unfamiliar with the process or have unrealistic expectations when an issuer goes into default — which until last year had not happened in Singapore’s bond market since 2009.
“When you have an issuer with a lot of debt secured against assets, issuing a notice of acceleration is normally the last thing you would ever do,” said a market source.
Assuming investors read the trustee deed in a typical 250-page prospectus for a Singapore dollar bond issue, they would have seen a warning in the risk factors that it may take some time before the trustee can take action on their behalf.
“Negotiating and agreeing to an indemnity and/or security and/or pre-funding can be a lengthy process and may impact on when such actions can be taken,” Rickmers Maritime said in the prospectus for its MTN programme.
Other clauses are less clear-cut and have added to investor confusion. One common clause in Singapore bond offerings says that the issue will be in default if an issuer “threatens to stop or suspend payment” of a substantial part of its debt.
Some bondholders felt that when issuers like Rickmers, KrisEnergy and Swissco warned they might not be able to make their next coupon payments or announced plans to restructure their bonds, that constituted an event of default, but a trustee may not share that interpretation.
Market participants hope the CDP and trustees can simplify the processes for procedures like enforcing investor protection, especially since the market has widened to include retail bonds, which are issued in smaller denominations and have even more holders.
“Wholesale bonds already have problems with trustees and the depository, so if we have a default on retail bonds it will be a multiple of that,” said a Singapore-based banker.
The MAS is said to be taking a keen interest in the complications that have arisen in the verification process, and there are hopes that it may act to improve it. It did not answer questions about CDP’s verification process, but earlier told IFR it was “engaging the relevant industry parties” in response to complaints from bondholders about the process of verification, among other matters.
DB International Trust, a trustee for many of the bond issues to have defaulted in Singapore recently, declined to comment. REUTERS
Defaults show weak points in Singapore bond market
Published: 5:20 PM, November 8, 2016
HONG KONG — A recent spate of defaults in the Singapore bond market has triggered calls for a reform of the Reublic’s depository system, which makes it harder for bondholders to enforce their rights than in the global market.
Investors have struggled to demand immediate repayment from issuers in default, and many have blamed trustees for seemingly delaying the process.
Holders of Swissco Holdings’ S$100 million bonds, on which a S$2.9 million Oct 16 coupon payment remains unpaid, wrote to the Monetary Authority of Singapore last month to complain that “the notes trustee does not seem to have an established process for noteholder verification that works”, according to a letter seen by IFR. The trustee is DB International Trust (Singapore), a unit of Deutsche Bank.
Much of the delay comes from efforts to verify that those demanding an acceleration of payment are really bondholders, and that part of the process has proved to be a bottleneck. Trustees do not keep names of bondholders, so they have to request them from the bond depository, which in Singapore is the Central Depository (CDP), under the Singapore Exchange.
“The manner in which the CDP system is set up can cause some additional complexities,” said Mr Andy Ferris, a partner at Hogan Lovells Lee & Lee. “For example, the trustee may have difficulty obtaining the list of bondholders from CDP, which can make verifying holders’ positions difficult. Only the issuer is seemingly entitled to that list on request.”
This differs from the process for international bonds, in which it is more straightforward for trustees to verify bondholder information.
“Euroclear or Clearstream can provide a statement of account for the purpose of proving holdings and custodians can provide holdings information via SWIFT. That streamlines the verification process,” said Mr Ferris.
Market sources said the CDP had changed its stance in recent weeks, and indicated that it could disclose bondholder lists to trustees if they could show good cause for requiring it, and pay a fee.
“The bond trustee is authorised under the trust deed agreement between bondholders and the bond issuer to obtain the list of bondholders from CDP,” said a spokesperson for CDP. “A bond trustee can do so by producing the trust deed to CDP. Upon verification of the bond trustee as identified in the trust deed, CDP will release the list of bondholders as at a specific date within two business days.”
MANUAL MESSAGES
It may take only two days to obtain the list of registered bondholders, but that is only part of the story. Some bonds are held in nominee accounts, meaning that there could be several layers of ownership.
In the global markets, an electronic message can be sent through Euroclear or Clearstream to reach all of the banks involved in the network of holdings. The last one in the chain then sends the details of the beneficial owner to the trustee.
In the Singapore bond market, every step of that process has to be performed manually. That means the trustee needs to contact every bank involved, until it obtains details of the ultimate owner of each bond, which means it can take more than a week to identify bondholders, according to market sources.
The situation has been complicated by the investor base, with some high-yielding Singapore dollar bonds held by more than 100 individual investors and no institutions.
With relatively limited resources, such investors are less willing to pay financial advisers to represent their interests, or to pre-fund and indemnify trustees who take action on their behalf. It is also practically impossible for bondholders to team up with other holders of the same notes, since only the trustee has a means of identifying the owners. Nor do the terms of the usual trustee deed allow a trustee to arrange a meeting of bondholders unless there is a specific resolution to be discussed, and it cannot give preferential treatment, like individual meetings, to any particular bondholder.
DEFAULT RISKS
Some investors have shown themselves to be unfamiliar with the process or have unrealistic expectations when an issuer goes into default — which until last year had not happened in Singapore’s bond market since 2009.
“When you have an issuer with a lot of debt secured against assets, issuing a notice of acceleration is normally the last thing you would ever do,” said a market source.
Assuming investors read the trustee deed in a typical 250-page prospectus for a Singapore dollar bond issue, they would have seen a warning in the risk factors that it may take some time before the trustee can take action on their behalf.
“Negotiating and agreeing to an indemnity and/or security and/or pre-funding can be a lengthy process and may impact on when such actions can be taken,” Rickmers Maritime said in the prospectus for its MTN programme.
Other clauses are less clear-cut and have added to investor confusion. One common clause in Singapore bond offerings says that the issue will be in default if an issuer “threatens to stop or suspend payment” of a substantial part of its debt.
Some bondholders felt that when issuers like Rickmers, KrisEnergy and Swissco warned they might not be able to make their next coupon payments or announced plans to restructure their bonds, that constituted an event of default, but a trustee may not share that interpretation.
Market participants hope the CDP and trustees can simplify the processes for procedures like enforcing investor protection, especially since the market has widened to include retail bonds, which are issued in smaller denominations and have even more holders.
“Wholesale bonds already have problems with trustees and the depository, so if we have a default on retail bonds it will be a multiple of that,” said a Singapore-based banker.
The MAS is said to be taking a keen interest in the complications that have arisen in the verification process, and there are hopes that it may act to improve it. It did not answer questions about CDP’s verification process, but earlier told IFR it was “engaging the relevant industry parties” in response to complaints from bondholders about the process of verification, among other matters.
DB International Trust, a trustee for many of the bond issues to have defaulted in Singapore recently, declined to comment. REUTERS
