Bond investment is always in voracious demand in Singapore. With many years of low deposit rate and lifeless Singapore stock market, people are struggling to find a better investment to place their hard-earned savings.
Probably because the majority of the retail bonds are sold by the banks, many Singaporeans treat bonds just like fixed deposits – You put money with the bank, reap the coupons, and take your principle back when it is matured.
This created an interesting phenomenon that people lining up to buy bonds from whichever company promises a higher coupon.
- $160m limited tranche bond issue with annual “interest” of 7.125% in 2013
- $100m limited tranche bond issue with annual “interest” of 5.55% in 2014
Do these offers sound attractive to you? They certainly were to our fellow Singaporeans:
- The first bond offer received a $240m order
- The second bond offer received over $500 million offer
But these investors are going to have a hard time getting their money back because these bonds were issued by Swiber Holdings, which has just made an application to wind up the company.
If you are someone who is interested in investing in bonds, here are the 3 lessons you must learn from this event.
Lesson #1: Relying on yourself, not the banks
According to a Straits Times article,
A self-employed man, who wanted to be known only as Mr Jin, said he had invested $500,000 in two Swiber bond issues through DBS. “I was simply following the advice of my relationship manager, who never told me much about the company. I just thought, a bank in Singapore, with this much regulation, would not recommend risky investments,”
Some investors even went to the extent to borrow money to buy those bonds. According to the same article,
Another investor, who asked to be known only as Laura, 34, and a banker, said: “My banker said DBS could lend me money to invest, so I’m 50 per cent leveraged on Swiber bonds. Now they’ve defaulted, I’m asked to pay the bank $250,000 by next Tuesday to cover the margin.”
What can I say? It is your money, not the banks’.
Lesson #2: Default risk of bonds is more real
To be clear, Swiber Holdings is not a fly-by-night company.
- It is a main board listed company and was big in the oil and gas industry.
- It offers a full suite of engineering, procurement, construction, installation and commissioning services which are customised to cater to the different needs of its customers.
- It owns 13 construction vessels
- It more than 2,700 employees.
It is a firm that went through 20 years of up and down and yet fails in a blink. The credit risk is real to all bond investments.
When you buy a bond, you are effectively lending money to the company to run its business.
Just think about it, if the company can borrow from any financial institutions at a good rate, why do they bother to go through the hassle and offer the bond to you? And for the banks who sell you the bonds, why didn’t they snatch it in the first place if this is really a good opportunity?
Lesson #3: Bad investment is often pretty obvious
Whenever investors lose money, they always blame other people first, the bankers or relationship managers. If not, it must be an “unprecedented” event that nobody can foresee.
I think there’s a part in each one of us that wants the impossible to happen, and that’s what surprises are. – American actress Gina Carano
The falling of Swiber Holdings is hardly a surprise.
Since last year January, I have already written some articles about the credit crunch brewing in the oil and gas industry. Back then, the danger of debt instrument (bonds) in this sector was already revealed.
Even if you are a stock investor, you could clearly see that 2 years ago when the oil price started tumbling.
The problem is that most people can see this but they choose to deny. That is the mentality of buying and hold and hope for the best, which always hurts your own pockets.
What if you want to invest in Bonds
My simple answer to you is to just invest in Bond funds.
Bond investment is more complicated than what most people think. It is often sold as a buy-and-forget investment but it hardly works that way. A good bond investment manager can produce tremendous values from time to time.
A bond fund also has the benefit of diversification which no individual investor can replicate.
In Singapore, most bonds require a minimum of $200,000 for a single issue. In the case of Swiber Holdings bond, your entire $200,000 is at risk. But if you invested in a bond fund which also bought the same Swiber Holdings bond, your risk is probably less than 1%.
How do you think about bond investment? Leave your comment and questions below and I will answer them all…
Hi Ivan. I’m more curious about how does dbs protect itself from incurring further losses with the appointment of JM? DBS had lent them so much money but only half of the debt of is secured by the collaterised asset. Do u think the JM does help much in this case?
Thank you for sharing your knowledge and experience. Could you share what bond funds are out there that is a good buy now?
United SGD Bond fund is a good and stable bond fund with long track record.
At this moment, there are some high yield bond funds which are worth investing too. But note high yield bond investment is cyclical and I would only invest when there is a good trend.