Aided and abetted by the Monetary Authority of Singapore (MAS), Singapore's domestic debt capital market has witnessed incredible growth. In the last five years and particularly the last three, there has been a tenfold increase in corporate issuance, rising from S$5.1 billion ($2.81 billion) in 1995 to S$50.5 billion in 2000.
Certainly as far as far as primary issuance goes, this trend looks set to continue. Participants at the OCBC and JP Morgan-sponsored conference say that there will not only be an increasing diversity of issuers on the domestic side, but also growth in issuance from high quality foreign borrowers looking to take advantage of Singapore’s low interest rates.
The yield curve is also growing – Singapore Power set a precedent for corporate borrowers last week with a 12-year issue, lead managed by JPMorgan and OCBC. And the government bonds market will also be extended later this year by the issuance of 15-year debt.
The MAS has certainly done its job fostering development, but it appears there isn’t much more it can do in terms of liberalizing the market. From now on the market is going to have to look after itself to resolve any remaining problems.
So just what are these issues that need resolving? Speaking at the event, OCBC’s vice chairman and chief executive officer, Alex Au, believes there are three things that need to be addressed. First, the need for a more liquid secondary market; secondly a need for more sophisticated products; and finally greater price transparency.
Au is convinced that all three matters will in time be resolved by increased competition. “Many of the changes to date have been driven by regulatory initiatives,” he says. “As we look to the future, we can perhaps expect a few more regulatory movements – but the bulk of future changes will be driven by market pressures and increased competition.
“Previously, the Singapore bond market has been dominated primarily by local players,” Au continues. “Today, competition is world-class and not limited by national boundaries. We can expect market competition to not only intensify further, but also bring about benefits such as pricing transparency and market efficiencies.”
Few, if any, of the delegates attending the conference would argue with Au’s assessment of the current Singapore market. It does need changes to push it forward, with a liquid secondary market being possibly the most important.
Traditionally, Singapore’s bond buying community are buy and hold investors, keeping the bonds until maturity and inhibiting secondary trading. The situation is improving, however, and real change could be driven by an increased diversity of investors – such as retail buyers and fund managers - and products such as credit derivatives for banks and investors to hedge against.
Samuel Liu, vice president of JPMorgan’s Asian DCM team, believes the matter is two-fold. “Increasing the investor base will certainly help, and from our perspective, hedging instruments would also boost secondary trading, such as a bond futures market.”
Even as a triple-A rated entity that can usually enjoy favorable pricing on the primary market, the assistant vice president of treasury at Singapore Power, Ng Marn Har, also warms to the benefits of a boost in secondary market activity.
“We like to see our bonds being actively traded because then you get realistic pricing which you can use as a benchmark for future issuers,” argues Har. “It also helps us to create our own yield curve.”
Liu believes that pricing in Singapore would perhaps be more accurate if there was a shift towards how deals are sold in more traditional markets. “Singapore’s pricing mechanisms are driven by a hard underwriting process where issuers and the lead manager agree on the yield beforehand,” he says. “Internationally, it’s done by bookbuilding where a borrower announces its intention to issue, then the underwriter goes and gets feedback from the market, then goes back to the issuer who takes that into account. Bookbuilding insures that transactions will be well received.”
In terms of increasing sophistication of product, one sector where Singapore has seen little activity is securitization. That could be about to change, however, with another relaxation on bank restrictions that could see them and other financial institutions re-parcel their loan portfolios into asset-backed paper.
“In the past, banks have needed to notify borrowers for their approval to securitize assets,” explains Lucien Wong, managing partner of law firm Allen & Gledhill. “But new bank laws introduced in a recent bill remove the need to get consent so we are likely to see more of this kind of product in the future.”
Essentially then, the overriding feeling is that Singapore’s bond markets, well nurtured initially by the MAS, now need to move on to the next level and the signs are that it is doing that. Issuance continues to rise and we are seeing a significant broadening of the investor base and new products such as bond futures, credit derivates emerging.
Pricing is still a sticking point right now, so it would be impossible to say it has moved on to the next level just yet. Generally, however, there is growing acceptance that the mechanisms determining pricing must change. New technology such as on-line trading will help Singapore to achieve its next set of goals.