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Bonds and Fixed Income

Should You Still Invest In Bonds After The Recent Defaults In The Market?

Is the 2008 global financial crisis happening again?

 

It was not too long ago that bonds were “darlings” in the investment community. Many individuals and even companies were jumping on the bandwagon to park their money in bonds which gave attractive returns in a low interest rate environment.

This demand from retail investors spurred banks to create more such products paying handsome returns upwards of 5%. At the time, oil prices were trading steady at over US$100 and Singapore’s economy was holding firm.

Many investors, thinking that bonds were generally safer products compared to equities, put large chunks of money into new issues by companies that were looked upon as safe. This continued to persist even after the quality of companies that issued retail bonds started declining.

The market was flushed with bonds, and several companies, including property developers Oxley Holdings and Aspial Corp, even offered retail bonds, in denominations of S$1,000, that could be traded on the SGX. Such bonds tapped into a newer segment of the market that wanted to get in on the action that only “accredited” investors seemed to be enjoying.

Accredited investors, in this case, refer to individuals who have earned $300,000 in the past 12 months. While this is difficult to achieve, another way to qualify is for the individual to have at least $2 million of assets which some people, who may not have large cash holdings, may qualify for because home prices have risen at astounding levels since 2008. These people, while considered accredited investors, may not be rich or be able to withstand huge losses in investment.

The Meltdown

Things looked rosy. And many investors probably did not know what they were buying into nor did they care about the risks they were taking on. All they were concerned with is that they were seeing their investment pay off. Sound familiar?

Just like the credit crisis saga of 2008 in the USA, ugly stories of mis-selling by greedy bankers only emerged after people started losing their retirement and/or life savings.

This time around, the latest crisis caused by the plunge of oil prices has hurt the global economy, including Singapore’s offshore & marine and oil & gas sectors. Triggered by the first default in Singapore’s bond market by Indonesia telecommunications product distributor, PT Trikomsel Oke, the floodgates seemed to have opened.

Since then, many other companies including Pacific Andes Resources Development Ltd., Otto Marine, Swiber Rickmers Trust Management, Marco Polo Marine and others have run into troubles repaying loans and have seeked recourse by loosening debt covenants or extending the maturity of their bonds.

It was only after this that news articles on the local papers started carrying horror stories of investors that “could barely understand English” signing papers their relationship managers put in front of them and even of others being talked into leveraging over 50% on bonds by borrowing from the very bank that sold the bonds to them in the first place.

When Does Passing The Buck Finally Stop?

This begs the question once again – who is at fault for investors losing their life savings? No doubt, with rules requiring buyers to “accredited investors”, for some of the bonds, the banks will usually take the easy way out by saying that they were merely creating a product that was in demand by such investors.

In addition, they could simply wave signed documents to anyone who wants to take them to court – would the law protect banks or side with smaller investors? That will be interesting to see, if it ever happens.

Could it be the fault of the companies that default? Usually, companies will issue bonds when it is a cheaper option to finance a loan. There still could be arguments that companies abuse this system by taking excess debt and risk for growth and expansion. If they succeed, equity holders stand to make unlimited gains while bond holders get what is promised. If they fail, equity holders lose what they have invested and bond holders do not get back their money.

Another way to look at it is that investors need to take a good hard look at themselves. Investors did not care about what they were getting into as long as they were paid a handsome return.

But logically, with returns that is in far excess to low market rates, invstors should have asked themselves what were the risks that they were facing. Investors cannot keep hiding behind the excuse of being mis-sold certain products, they have to understand what they’re putting their money into.

Should You Still Buy Bonds? And What Should You Look Out For?

Bonds are still a viable investment. The problem with high-yield bonds is that they are usually high-risk. Investors must understand that they are receiving the high yields because they are taking on high risks.

The Singapore Savings Bonds, which currently offer returns of approximately 1.7% per annum, is a good way to invest in an extremely safe and liquid instrument. Investors could also look at the ABF Singapore Bond Index Fund which delivers a slightly higher return per annum at 1.84%.

Traditionally, bonds are harder to exit out of and thus investors must be careful in choosing the right bonds to invest into. When choosing riskier bonds to invest into to attain better returns, one thing you can do is to look at what the bigger funds are buying. They usually have more resources and expertise to monitor firms and see default threats earlier than any individual retail or “accredited” investor can.

You could even buy into high-yielding bond ETFs or mutual funds to diversify your risk across many high-yielding bond issuers that operate in different regions and industries. This way, your returns are sheltered even when a company in the fund defaults.

Other factors to take into consideration is that certain issues are only available to institutional funds and in a case where things go south, these funds have more clout to take on errant banks or management to court.

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