THE Monetary Authority of Singapore’s (MAS) grant scheme to cover credit rating costs for unrated issuers seems like a no-brainer. However, ask investors whether the MAS scheme can help revive the Singapore dollar bond market, and the majority are either sceptical, or give a resounding ‘No’. Why?

In response to the spate of defaults of unrated companies in the oil & gas and shipping service sectors in recent years, the MAS launched the grant scheme last June to encourage Singapore dollar bond issuers to get a rating. Qualifying issuers can claim up to 100% of their rating expenses, with a funding cap of S$400,000 (approx. US$305,000) per issuer.

The logic is as follows: the Singapore dollar bond market is unhealthy in having too many unrated issuances. Cost is a major barrier to issuance. Remove this barrier and more issuers would seek a rating. More rated issuances would then improve the health of the market. However, over half (55%) of institutional investors are sceptical of the impact, according to Asset Benchmark Research’s (ABR) 2017 Asian Local Currency Bond Benchmark Review.

For some, the efficacy of the scheme is limited by the nature of the investor base: “It’s good, I just wonder what the take-up is? I don’t think it will help to prevent defaults. It’s good to have more disclosure, but if the ones (companies) that have issues are typically bought by the ‘retail’ people then you have to look at how they look at investing,” says one portfolio manager in Singapore, who highlights the need for investor education.

The retail segment also only forms part of the demand for unrated bonds, and a large chunk comes from private bank investors. “They (private banks) are driven by other things, how much leverage they can get. It’s very different technicals altogether,” adds the PM.

For others, the scheme doesn’t go far enough. A Hong Kong-based manager involved in a range of local currencies thinks a more radical policy is needed: “What would really help is for ratings to be compulsory and for government-linked companies to take the lead in getting themselves rated.” The Land Transport Authority and the Public Utilities Board are some examples of unrated quasi-sovereigns issuing in the currency that could potentially get rated.

“You might as well make it compulsory,” agrees a Singapore-based investor. “If you do some and not others, those that know they won’t get a good rating will not do it anyway.” He argues that while some of the large household corporate names think they don’t need a rating, it still enables investors like himself to have a point of comparison.

Moreover, one in five investors are not just sceptical, but actively negative about the scheme. The lack of depth of the Singapore dollar bond market means global investors looking for yield are not likely to put their money in these corporate bonds in the first place, according to bank participant based in Hong Kong. “There's little use [investing in the Singapore dollar bond market] due to poor liquidity and lack of dedicated market makers in the Singapore dollar space. No issuer will rate just for that one-time offset,” he says.

Another fund manager is doubtful about the interest from local companies and argues that for them bank loans are still the traditional and cheaper source of funding: “It is likely they (companies) will choose this route rather than issuing bonds. Issuing bonds also requires that you stick to a schedule to release information to the bond holders and more investor relations is required.”

About a third (35%) are supportive of the grant, saying it offers reassurance for bond investors after the media frenzy around defaults such as Swiber and Swissco Holdings. They say more rated bonds will lead to better credit information and credit differentiation, enable price discovery and allow small companies to tap the bond market by lowering barriers to entry.

Methodology
The Asian Local Currency Bond Benchmark Review was conducted in the first quarter of 2017. Over 300 local currency bond investors including asset managers, hedge funds, private banks, insurance funds and commercial banks from 11 Asian markets namely China, CNH, Hong Kong, India, Indonesia, Korea, Malaysia, Philippines, Singapore, Taiwan and Thailand took part.

Data sets include market penetration, market share/wallet share, buying criteria/client satisfaction, research content and the top individuals. To learn more about the Asian Local Currency Bond Benchmark Review please click here.