Private: A primer to understanding corporate bonds in Singapore

As compared to government bonds that are issued by the Singapore government, Singapore corporate bonds are debt instruments issued by local companies to raise capital from the financial markets. These are traded on the Singapore Exchange and, for reasons that we are about to elaborate upon, require more detailed thought and careful consideration before investing.

 

What you need to consider before investing in corporate bonds:

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Corporate bonds are usually assigned a rating by third-party credit ratings agencies such as S&P (Standard & Poor's) to reflect the creditworthiness and default risk of a company.

Ratings from AAA to BBB are considered investment grade while lower ratings are considered non-investment grade.

A company with a stronger balance sheet is typically given higher rating with a lower chance of default, while a lower rating is given to companies considered to be less financially stable and therefore associated with higher default risk.

While not always the case, corporate bonds are usually given a relatively lower rating compared to government-issued bonds since the probability of a company to default on its liabilitites is more likely compared to the government of a sovereign state; country..

 

Higher capital outlay required

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Corporate bonds usually fall into the latter category due to the higher risk involved. To appeal to potential buyers, non-investment grade bonds tend to offer higher yields compared to investment grade bonds.

Because of the risk involved, corporate bonds are only available to accredited investors. These are individuals with very deep pockets since the minimum investment sum for corporate bonds begins at a whopping S$250,000.

The capital outlay seems steep for most of us but with coupon rates, some of which pledges a variable or floating rate of as high as 7% in a foreign currency, the risks associated with are seemingly fairly offset.

 

On cashing out

There are also corporate bonds that have a semi-annual coupon yields that guarantee a fixed amount in comparison.

Corporate bonds can be redeemed before maturity date although doing so doesn’t necessarily generate a penalty but there can be associated costs in doing so which include loss on principal, loss on interest, capital gains tax and commission.

It is then up to the investor if the incurrences of these additional costs outweigh the benefits of an early withdrawal. When interest rates rise, bond prices fall.

Because of this, early withdrawal puts your principal in the hands of variable market factors and may leave you shortchanged against your best interests.

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The performance of corporate bonds is therefore highly dependent on the company that issued them thus historical performance, balance sheets; nature of the business and external market factors plays a critical factor as to how investors would react.

Based on this information, investors can also make better judgment of their next course of action in purchasing or selling.

Due to the volatile nature of corporate bonds, it is highly difficult to put a monetary value to them and may be more suited with investors who are more risk tolerant.

Some examples of corporate bonds in Singapore include Capitaland Limited, City Developments Limited, DBS Group Holdings Ltd, Oversea Chinese Banking Corp and Singapore Airlines Ltd. 

(By Lily Teh)

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