The Complete Guide to Wholesale Corporate Bonds in Singapore September 10, 2020
Corporate bonds are a dominant source of funding for companies around the world. As they say, money makes the world go round, and bondholders are a big source of that money for companies. Bondholders act as creditors to these companies, lending money to them in exchange for regular streams of coupon or interest payments, and ultimately their principal back on a specified maturity date.
Yet, corporate bonds remain a big mystery to many investors. In particular, investors are curious about the types of bonds available, the way they trade and more importantly, how to invest in them. In this article, we’ll take a deep dive into corporate bonds and how you can begin to use them as a source of fixed income.
1. What are corporate bonds
2. Wholesale bonds vs Retail bonds
3. Why corporate bonds
4. Types of corporate bond structures
5. How to invest in wholesale corporate bonds in Singapore
6. Risks in corporate bonds
What are corporate bonds?
A corporate bond is essentially a loan to a company; a loan that the company can use for general day to day running of its business, acquisitions, or for execution of its growth strategies. At their most basic level, corporate bonds have a maturity date where your principal is repaid, a coupon rate which is the interest rate paid on the bond at par, and a coupon payment frequency, which is the number of times per year your coupons are paid. Corporate bonds in Singapore usually pay coupons semi-annually or twice a year.
Wholesale bonds vs Retail bonds
There are two ways bonds are traded in Singapore, wholesale and retail. Wholesale bonds trade in minimum denominations of S$250,000 and make up the majority of the total SGD denominated corporate bonds in Singapore, over 370 wholesale bonds as of August 2020. Retail bonds, on the other hand, trade in lot sizes of S$1,000, with less than 10 retail bonds available to investors. A key difference between wholesale and retail bonds is wholesale bonds are traded Over-The-Counter (OTC), while retail bonds are traded on the stock exchange. Many investors, familiar with stock trading, will understand the mechanics involved in retail bond trading, however, the OTC markets are where things begin to get mysterious.
Essentially, OTC trades are done directly between two parties rather than through an exchange. When assets are traded OTC, transactions are not captured on a universal exchange, and bid and offer quotes meet cannot be seen unless a counterparty relationship is established. In other words, more ground work and networking are in play. This is where a broker, such as PhillipCapital Bond Desk, fulfils the process for bond investors.
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Why corporate bonds?
Many investors seek a safe way to make their money to work for them. Popular ways to do so include fixed deposits, endowments and Singapore government bonds (SGS) for a predictable income stream. While these may be popular and largely risk-free, we, as well as institutional investors, believe corporate bonds are a more efficient way for a fixed income on your cash.
1. Corporate bonds pay a higher yield
In exchange for an absence of a guarantee, you can easily find a corporate bond paying double the fixed deposit rate. As at Aug 2020, fixed deposit rates in Singapore ranged from 0.8% to 1.3% p.a. Government bonds yield between 1.46% to 1.91% for tenors of 1 to 10 years, while short-term guaranteed endowment plans between 2 to 6 years return between 1.67% to 2.1% p.a. As a comparison, using Temasek-linked bonds as a relatively safe comparison, yields ranged from 2.03% to 3.94% for tenors of 2 to 10 years. With due diligence, corporate bonds can provide much healthier yields than other fixed income assets.
2. Lower risk and volatility
Corporate bonds are generally considered safer than stocks by promising regular coupon payments and principal at maturity. In addition, in an event of default, bondholders will be paid out before shareholders as well. As such, bond prices tend to be more stable than stock prices, and act as hedges in investment portfolios.
3. High cash flow visibility
Corporate bonds allow for precise cash flow planning in various stages in life. Whether is it covering expenses for a car loan while making sure you receive your principal back before your child enters university, or simply ensuring enough passive income to live a comfortable retirement, fixed income is one of the best ways for achieving predictable cash flows.
4. Secondary market liquidity
When it comes to fixed income products, corporate bonds are one of the most liquid, with secondary market trading. In addition, there are no exit penalties unlike some fixed deposits or endowments with pre-termination clauses. Corporate bond liquidity is based on market forces and readily available buyers and sellers.
Types of corporate bond structures
The three most common structures of bonds in Singapore are the straight bond, callable bond, and perpetual bond. Understanding their key differences will help you pick the right one for your investment portfolio.
1. Straight/bullet bonds
The most basic bond is the straight or bullet bond which features a fixed coupon rate over a specified tenor with a specified maturity date where your principal is returned. Straight bonds are usually senior in ranking.
2. Callable bonds
Callable bonds are similar to straight bonds; however, they include a call feature that gives the bond issuer the option to redeem the bond at the earlier call date. At times, callable bonds will include a coupon step up provision that will increase the bond’s coupon rate should the issuer opt not to call the bond on the call date. Callable bonds are usually ranked senior as well.
3. Perpetual bonds
Perpetual bonds have no maturity dates, but only call dates. As such, they can theoretically last forever if the issuer never calls back the bond and repay the principal. Due to the absence of a maturity date, perpetual bonds are usually accounted as equity in a company’s balance sheet, which brings some benefits in terms of improving gearing ratios. However, these bonds are usually subordinated in ranking and thus will cost the company in terms of higher coupon rates required by bond investors.
How to invest in corporate bonds in Singapore?
Corporate bond ETFs and Retail Bonds can be traded on the stock exchange similar to stocks, however, in this article, we will focus on the trading of wholesale bonds, which are traded OTC. Most brokerage house and bank platforms in Singapore provide access to corporate bonds. However, due to the OTC nature of trading, having strong access to counterparties is key to finding the best platform for your investment needs. For example, at PhillipCapital Bond Desk we leverage on our global offices access to over 70 counterparties for bond price discovery and liquidity.
Here is a step-by-step guide to OTC trading of wholesale bonds in Singapore:
1. Opening a trading account
A trading account is required in order to view bond quotes and place bond orders. When deciding on the type of trading account to open, note that a custodian account (where bonds are held with the broker) will provide better ease of trading compared to a Central Depository-linked (CDP) account (where bonds are held in CDP). This is due to the transfer process required if your bonds are held in CDP. To open a trading account with Phillip Securities, visit this link here.
2. Viewing bond quotes
After your account is opened, you’ll be able to access bond quotes and information from our POEMS 2.0 platform.
3. Placing bond orders
Your bond orders can then be placed online or through a financial adviser representative either as a market order or a limit order indicating a maximum price or minimum yield at your preference. Our bond specialists will then execute the order with our counterparties to find the best buyer or seller based on your order. You will receive a confirmation of your order when it’s done, followed by the order settlement.
4. Bond trade settlement
The key thing to note when thinking of bond trade settlement is the accrued interest. Accrued interest is any unpaid interest based on the days to the next coupon payment date that is due from the buyer to the seller of the bond. The seller is never shortchanged of their coupons regardless, unlike stocks which have ex-dividend and cum-dividend dates. When you place your bond order, the accrued interest amount will be indicated to you. Upon settlement, total payment due to purchases will include the accrued interest amount.
Risks in corporate bonds
1. Interest rate risk
Interest rates play a key role in the fixed income market performance. Specifically, bonds underperform during periods of rising interest rates, and outperform when interest rates fall. The technical term for a bond’s price sensitivity to interest rates is called duration risk.
2. Reinvestment risk
When a bond matures or is redeemed earlier than maturity, a replacement bond with similar or better investment returns may not be readily available to reinvest your funds in. As such, reinvestment risk may lead to relatively poorer bond investments in the future, depending on market conditions then.
3. Call risk/non-call risk
If a bond is called/redeemed earlier than maturity, future returns from the bond may be lost as the bond investor may not be able to find an equal or better replacement bond. Conversely, if a callable bond is not called on its first call date, bondholders may be forced to hold the bond with their existing or lower coupon rate for a longer time.
4. Default risk
This is the greatest risk to bondholders where they may lose all of their principal should the liquidation processes yield little cash back in the event of company default. In such circumstances, though, bondholders can be assured that they are structurally ranked higher than equity holders and will be paid out earlier. Doing your due diligence on the company and consulting financial advisors are great ways to mitigate this risk.
5. Inflation risk
Inflation stands for the rise in prices of goods in the economy, which leads to erosion of the purchasing power of our existing cash and of the real returns of our investments. This erosion of real returns is particularly emphasised on fixed income assets as returns are fixed and do not compensate for rising inflation.
We hope you’ve taken away useful information about corporate bonds. Corporate bonds can go a much deeper in details, however, knowing the basics sets you up for future learning. With the added knowledge, you can begin leveraging fixed income for your investment and lifestyle needs.
Should you have any enquiries, please send them to us at firstname.lastname@example.org and we’ll get right back to you.
PhillipCapital Bond Desk is a leading wholesale bond platform in Singapore, offering over 200,000 global bonds in 9 currencies and access to over 70 counterparties. Visit https://bonds.poems.com.sg/ to explore our offerings.
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About the author
Timothy covers fixed income analyses in the Asian bond markets. Starting his career as an equity specialist, he has over 5 years' experience in investments. He believes that value investments are important, always available, and add valuable returns.