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Old 14-09-2017, 12:25 PM   #1
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Question Proposal for insurance scheme to help bond investors

Proposal for insurance scheme to help bond investors

http://www.straitstimes.com/business...bond-investors

Amid unprecedented local bond defaults as offshore and marine- services firms convulse, Singapore's watchdog for 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 have jointly submitted to the Monetary Authority of Singapore a two-pronged proposal which calls for bond issuers to take up an insurance policy at the time of issuance, so that aggrieved investors will be protected in the event of a default.

If there is a default, the payout from the policy can go towards funding the costs of calling for meetings, and legal and financial advisory fees, all of which are now largely borne by bond holders.

Observers say such costs could burn a hole of between $100,000 and $500,000 in the pockets of frazzled investors, who would already be grappling with the fear of losing their life savings.

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 who have less financial muscle and experience.

Contacted by BT, Sias president David Gerald confirmed that the joint proposal was submitted to the regulator. "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.

"There has to be a mechanism through which retail bond holders won't be stranded in a default event," Mr Gerald said.

The call for reforms comes in the wake of bond defaults by offshore and marine-services firms battered by a prolonged commodity slump which has led to deep cuts in spending on exploration; in turn, this has hurt cash flow and compromised the firms' ability to meet debt obligations.

Bond holders here generally belong to a disparate group. They include many "mom and pop" investors who have put up $250,000 per issue, which is a sizeable chunk of their retirement nest egg.

In a default event, it is near impossible to canvass for support from other investors because they have no access to the list of investors. In addition, they have had cold comfort from the bond trustees, unless an upfront fee had been coughed up.

Given their helpless situation, investors have turned to Sias for redress. It appears their concerns have been heard.

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."

Against this backdrop, the latest proposal for bond-default insurance coverage could bring some hope and cheer to Singapore's bond market.

An observer said: "It's a bold initiative by the private sector to get issuers to fund the insurance premium when they are in good shape and raising funds."

However, he said he was doubtful about the merits of the proposal to set aside a mandatory tranche for institutional investors in bond issues. "That's not workable. I'm very sceptical," he said.

His argument is that there is a lack of demand from institutional investors for unrated corporate bonds and, in some cases, even rated issues, so issuers could face difficulties raising funds if there are no takers or a lack of takers for their bonds. "We can't, as a market, compel mandatory take-up of bond issues. It will make our market very unattractive... It's counterproductive," he said.
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Old 14-09-2017, 02:17 PM   #2
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Proposal for insurance scheme to help bond investors
Hugely misleading headline, because....

The Business Times understands that the Securities Investors' Association of Singapore (Sias) and Rajah & Tann Singapore have jointly submitted to the Monetary Authority of Singapore a two-pronged proposal....

If there is a default, the payout from the policy can go towards funding the costs of calling for meetings, and legal and financial advisory fees, all of which are now largely borne by bond holders.
Oh, this is rich. Bond investors are assured nothing. However, lawyers and other middlemen will be guaranteed payment in the handling of a bond default. Indeed, they'll be highly motivated to bill as many hours as possible and drag out "meetings" as long as possible, leaving fewer scraps for bondholders, paid later.

I hate this idea.

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 who have less financial muscle and experience.
Hope is not a plan, and it's entirely predictable that this won't work. All that will happen is that some "institutional investor" will buy the dog food...and then sell the same dog food on the secondary market, reinsure it, or otherwise wipe their hands clean of exactly the same dog food.

Contacted by BT, Sias president David Gerald confirmed that the joint proposal was submitted to the regulator.
Sure. They have a mailbox, and anybody can send them a letter. I'm not impressed.

"Where can bond holders who are in distress get the money to cover their legal costs and so forth?
I'm highly confident that bond holders are much more concerned about getting money. How about tackling that problem more directly? It's pretty simple, really. Just require that bond issuers buy well regulated insurance that, in the event of default, pays:

(a) 80% of the first $100,000 (2017 dollars, annually adjusted for inflation) per individual (maximum $80,000 recovery);
(b) 50% of the next $500,000 (2017 dollars, annual adjusted for inflation) per individual (maximum $250,000 recovery);
(c) Zero thereafter, with additional recovery per the status quo (attorneys, "meetings," etc.), via class action if that doesn't exist already.
(d) The bond insurer can pursue their own claim, to try to recover as much as possible, and any excess recovery (less a nice insurer incentive) gets paid to bondholders.

That works. It works much less well for lawyers, though.

The call for reforms comes in the wake of bond defaults by offshore and marine-services firms battered by a prolonged commodity slump which has led to deep cuts in spending on exploration; in turn, this has hurt cash flow and compromised the firms' ability to meet debt obligations.
These bad proposals have nothing to do with offshore bond issues. Singapore can only regulate what's issued in Singapore. If you buy a bond offshore, you're subject to that other country's rules, whatever they are. Which often means you can lose everything if there's a default or if you don't have clear title to the bond.

Thank goodness for CPF and Singapore Savings Bonds.

The Straits Times should have examined these ideas much more critically. This article reads like a reprinted press release, unfortunately.

Last edited by BBCWatcher; 14-09-2017 at 02:25 PM..
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Old 18-09-2017, 12:54 PM   #3
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Hugely misleading headline, because....

Oh, this is rich. Bondinvestors are assured nothing. However, lawyers and other middlemen will be guaranteed payment in the handling of a bond default. Indeed, they'll be highly motivated to bill as many hours as possible and drag out "meetings" as long as possible, leaving fewer scraps for bondholders, paid later.

I hate this idea.

Hope is not a plan, and it's entirely predictable that this won't work. All that will happen is that some "institutional investor" will buy the dog food...and then sell the same dog food on the secondary market, reinsure it, or otherwise wipe their hands clean of exactly the same dog food.

Sure. They have a mailbox, and anybody can send them a letter. I'm not impressed.

I'm highly confident that bond holders are much more concerned aboutgetting money. How about tackling that problem more directly? It's pretty simple, really. Just require that bond issuers buy well regulated insurance that, in the event of default, pays:

(a) 80% of the first $100,000 (2017 dollars, annually adjusted for inflation) per individual (maximum $80,000 recovery);
(b) 50% of the next $500,000 (2017 dollars, annual adjusted for inflation) per individual (maximum $250,000 recovery);
(c) Zero thereafter, with additional recovery per the status quo (attorneys, "meetings," etc.), via class action if that doesn't exist already.
(d) The bond insurer can pursue their own claim, to try to recover as much as possible, and any excess recovery (less a nice insurer incentive) gets paid to bondholders.

That works. It works much less well for lawyers, though.

These bad proposals have nothing to do with offshore bond issues. Singapore can only regulate what's issued in Singapore. If you buy a bond offshore, you're subject to that other country's rules, whatever they are. Which often means you can lose everything if there's a default or if you don't have clear title to the bond.

Thank goodness for CPF and Singapore Savings Bonds.

The Straits Times should have examined these ideas much more critically. This article reads like a reprinted press release, unfortunately.
No insurer will insure this short of very high premiums.
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