SIA flies the flag for retail bond buyers
In a pioneering move, the carrier is offering retail investors $50m of its $300m bond issue
By JAMIE LEE
(SINGAPORE) Singapore Airlines (SIA) has set aside part of its latest corporate bond offering for retail investors - the first listed company to do so.
The move also marks a coup for the Singapore Exchange (SGX), which has been eager to build interest in the fixed-income market, and comes against the backdrop of the Singapore bond market touching new highs.
Funds raised through Singapore-dollar bonds stand at $17.7 billion to date - a record in the debt issuance market, Bloomberg data shows.
SIA will issue $300 million of five-year bonds, of which $250 million will be placed out to institutional and other investors, and the remaining $50 million offered to retail investors, SIA said yesterday.
The fund-raising exercise - meant for capital expenditure and working capital - comes after SIA sold $500 million of 10-year bonds in June this year. The bonds to be issued, which are un-rated, will pay interest of 2.15 per cent per annum.
One difference with bonds tailored for retail investors is the size of the minimum subscription.
Under the public tranche, or retail bond portion, offered by SIA, the minimum subscription is $10,000 of bonds.
Based on the $1,000 value of each lot of bonds this means that retail investors need to hold at least 10 lots. Trading will be done per lot at $1,000 as well.
However, the minimum subscription for institutional and other investors of the SIA bond is $100,000 - 10 times that for retail investors.
In comparison, bonds from statutory boards such as the Land Transport Authority trade in lot sizes of $10,000 each, the SGX website shows.
And while Singapore government bonds can be bought with a minimum of $1,000, these instruments are currently not listed.
SGX has said investors will soon be allowed to trade government bonds.
Another difference is the level of disclosure required by SIA.
Companies that issue bonds to institutional and sophisticated investors - as traditionally done - do not need to submit a type of prospectus to the authorities.
This, known as the 'offer information statement', is a 113-page document in SIA's case that discloses information on the bond issue, including risk factors associated with investing in bonds.
Companies have always been able to offer bonds to retail investors but have been reluctant to do so, given the extra paperwork required by regulators to protect such investors.
'It is a more time-consuming process,' said George Lee, OCBC's head of group investment banking, adding that there are also higher distribution costs involved with the retail offer.
But bringing in retail investors can help companies diversify their investor base, Mr Lee added.
'SIA is a well-recognised brand. Tapping the retail investor base does create a lot more goodwill,' he said.
'Clearly, they could have just tapped the institutional investor base and easily closed off the issue, but they are testing the retail market. This will also help develop the retail bond market, and probably SIA sees it as its national agenda.'
Mr Lee said other companies will take a wait-and-see approach before deciding whether to offer bonds to retail investors.
Ling Peng Meng, regional head of capital markets in South-east Asia at Standard Chartered Bank, told BT: 'Conditions are favourable for potentially good take-up from retail investors, given robust retail liquidity generally and the limited availability of suitable investment alternatives for these investors.'
One remisier said there has been some interest from retail clients in the SIA bond issue, adding that clients in general are looking for yields of about 6 per cent.
Investors can apply for the SIA bonds from today until Sept 28.
The bonds are expected to be issued around Sept 30. DBS Bank, OCBC, and UOB are the underwriters of the retail offer. The three banks and Standard Chartered Bank are also involved in the placement.
Let's get right down to the specifications of the bond. The SIA bond has S$1000 par value, yield is at 2.15% p.a. disbursed semi-annually (S$21.50), maturity is 5 years.
We can immediately do the maths for the value of the bond using the formula:
If we call the maturity T and the discount rate r = 0.80 (There is no explicit discount rate in Singapore, so I will use the next best alternative, which is a money market fund, which contains mostly cash and government bills anyways), we will come up with a value of 21.33 + 960.98 = 982.31.
The bond value is actually $17.69 less than its face value or at 98.23%, and hopefully we can find a price close to this in the secondary market in October. If you buy before the issuance, take note that you have to cough up with the full face value of the bond which is S$1000 for a non-compounded 2.15% return for 5 years. In terms of company reputation, I really think that SIA is a good company and the chance of default within these 5 years is minimal, so is the risk that you are going to take upon with this bond. Another risk is that the discount rate might increase, thereby decreasing the price of your bond if you choose to sell before maturity.
To draw a personal conclusion, the bond may be more attractive if it becomes cheaper in the secondary market, and it might be a good alternative to put your S$10,000 besides in a savings account, or fixed-deposit, taking on a wee bit more risk. Interested investors can still ballot for these bonds at ATMs before 28th September 2010.
