Insurance policy for bond investors proposed
SIAS, Rajah & Tann seek to protect investors in event of default
Amid unprecedented local bond defaults as offshore and marine services firms convulse, an association of minority shareholders and a leading law firm are proposing an insurance scheme to help bond investors.
The Business Times understands that the Securities Investors' Association of Singapore (SIAS) and Rajah & Tann Singapore jointly submitted to the Monetary Authority of Singapore a two-pronged proposal that calls for bond issuers to take up an insurance policy at the time of issuance, so that investors will be protected.
If there is a default, the payout from the policy can go towards funding the costs of calling for meetings as well as legal and financial advisory fees, all of which are now largely borne by bond holders. Observers said such costs could be between $100,000 and $500,000.
The other proposed reform is for bond promoters to allocate a minimum 30 per cent of the total issue to institutional investors to diversify the investor base. It is hoped that, in a default event, institutional investors will take up the cudgels for their retail counterparts.
Contacted by BT, SIAS president David Gerald confirmed the joint proposal.
"Where can bond holders who are in distress get the money to cover their legal costs and so forth? They also have difficulties coming together with others in the same predicament. Their predicament is heightened as trustees of these bond issues are not able to assist them either," he said.
"There has to be a mechanism through which retail bond holders won't be stranded in a default event."
Bond holders here generally belong to a disparate group. They include many "mom and pop" investors who have put up $250,000 for an issue.
There has to be a mechanism through which retail bond holders won't be stranded in a default event.Mr David Gerald, president of the Securities Investors' Association of Singapore
In a default event, it is near impossible to canvas support from other investors because they have no access to the list of investors. In addition, they getcold comfort from the bond trustees, unless an upfront fee had been coughed up.
Some of these investors had put money in notes issued by Nam Cheong, Ezra Holdings, Rickmers Maritime and Marco Polo Marine.
In many of these cases, SIAS facilitated townhall sessions between investors and the issuers. Still, these investors face a double whammy.
A market watcher said: "They were supposed to collect coupon payments. Now they face the risk of losing their savings, on top of being asked for more money to fund the cost of seeking redress."
The latest proposal for bond-default insurance coverage could bring some hope and cheer to Singapore's bond market.
But an observer was doubtful about the merits of the proposal to set aside a mandatory tranche for institutional investors for bond issues.
His argument is that there is a lack of demand for unrated corporate bonds - and in some cases, even rated issues - from institutional investors, so issuers could face difficulties raising funds if there are no takers or a lack of takers for their bonds.
"We cannot, as a market, compel mandatory take-up of bond issues. It will make our market very unattractive... It is counterproductive," he said.