Complete Guide To Investing In Corporate Bonds In Singapore

In Singapore, bonds are an important asset class allowing investors to diversify from having only stocks or property investments within their portfolio. Typically, there are two main types of bonds we can invest in – government bonds and company bonds.

In this article, we will delve deeper into how to begin investing in corporate bonds in Singapore.

What Are Corporate Bonds?

As its name suggests, corporate bonds are from corporates or companies. When we purchase corporate bonds, we are lending our money to those companies in exchange for an interest payment. Typically, the riskier the organization, the higher the interest it has to pay to draw in investors. This is also why bonds issued by the Singapore government, namely the Singapore Government Securities (SGS) and Singapore Savings Bonds (SSB), shell out the lowest interest rates.

Once we lend our money towards the company, it is usually free to use it as being it sees fit. The purposes of funds from bond issues typically include paying off higher-interest debt, purchasing new properties or assets for that business, acquiring another business or investing in new products and many others.

In recent years, corporate bonds might have come under a bad rap as defaults on bonds issued by Hyflux, Swiber and Noble Group. For this reason we need to remain prudent when investing in corporate bonds rather than just assume it to be safe.

Corporate bonds typically make semi-annual coupon payments every six months, and return our entire principal only at the end of the tenure of the bond.

What Determines The Interest Rates On Corporate Bonds?

Credit Quality Of Bond Issuer:

As mentioned, higher-risk companies have to pay more interest to attract us to purchase their bonds. The logic is simple – given equal interest rates, investors will always choose to lend to companies that are not as likely to default on the payments.

As such, the government of Singapore offers a benchmark risk-free rate, and firms have to issue their bonds confined to it. This is called the yield spread.

One method to determine the riskiness of a company is to simply look at its business. A large international company like DBS or perhaps a government-linked entity like PSA International will probably pay much lower interest than even strong companies like Olam International and OUE Commercial REIT.

While simply looking at the strength of the company provides for us a good estimate of its riskiness, this is a rudimentary way to determine the riskiness of a company's bond. Another way we can go about doing so is by taking a look at its credit rating. Global credit ratings agencies like Moody's, Fitch and Standard & Poor's analyse bonds (and companies) to provide a credit rating. While this is an easy method to determine the riskiness of a bond, the truth is that not all corporate bonds are rated.

Maturity:

Typically, the longer we have to wait before receiving our principal, the higher the interest rates we should receive.

One way to look at it is to imagine the same company issues two bonds – a 1-year bond along with a 10-year bond. Even though it is the same company, there is a higher risk that the company deteriorates in creditworthiness or run into financial difficulties over a 10-year period compared to a 1-year period.

We also attach a greater premium to bonds that just return our principal following a much longer period of time.

Interest Rate Environment:

To appreciate this, we have to compare the yield spread on the risk-free rate.

Consider this imaginary (but far-fetched) situation, the SGS bonds start paying 10% interest on its 10-year bonds tomorrow. The strongest companies like DBS and PSA International need to pay a higher interest rate if they wish to issue a bond. It is because the risk-free rate has climbed, and they have to pay a premium over the risk-free rate since there is a greater risk they run into financial difficulties than the Singapore government.

Similarly, within the low interest rate environment today, where government bonds are issued for less than 1% per annum, poorer quality companies may be able to issue bonds offering lower rates of interest than before.

Why Choose To Buy A Company's Bonds Rather Than Stock?

When we invest in a company's bonds, we are merely lending the company some cash over a period of time in exchange for charges. Choosing to invest in a company's stock means we become part-owners of the business.

There are several reasons we may choose to buy a company's bonds instead of its stocks:

#1 We receive our coupon payments regardless of the financial performance of the company. What this means is whether a company makes a profit or loss, we'll still take our rightful interest payment. However, we typically only receive dividends from a company if it has strong cash flows and it is profitable. On the flipside of the argument, we cannot participate in the development of the company by just investing in its bonds.

#2 We could preserve our capital in downturns as our principal and interest payments are guaranteed. This is also why many investors think that bonds a safer investment than stocks, which usually experience more volatility during downturns.

#3 We are able to predict when, and for how long, our interest payments will be made, and when our principal will be returned. This enables us to make concrete intends to use our funds later on. This reliability in knowing exactly when and how much we will receive is hard to come by in other asset classes.

#4 Bond investors have superior legal states a company's assets when it gets into financial difficulties. Stock investors are only able to get their money after bond investors along with other creditors are paid.

#5 We're able to also choose to buy bonds over more stocks to diversify our portfolio with a less volatile asset class.

How To Buy Corporate Bonds?

Similar to investing in stocks, there are two ways to purchase bonds – via new bond issues or on secondary markets.

OTC Markets:

Unlike stocks, most corporate bonds are usually sold on Over-The-Counter (OTC) markets. Which means you have to get a banker that will help you make such transactions. To do this on our own, we can utilise platforms like FSMOne or dollarDEX to invest in bonds and bond funds.

Retail Bonds:

Retail bonds are a smaller group of bonds that we can invest in similar to how we buy and sell stocks – on the exchange. Here is the list of the 11 retail bonds on the Singapore Exchange (SGX). When retail bonds are first issued, we are able to purchase them via ATMs (much like how we would invest in a new IPO). We are able to also buy and sell these bonds on SGX like stocks.

Through this, we can gain access to quasi-government companies such as Temasek Holdings’ bond issue in addition to Astrea IV and Astrea V, enabling us to access private equity.

Bond ETFs:

Bond ETFs are listed on the SGX, and we can buy and sell them similar to stocks and retail bonds.

The first and only corporate bond ETF, Nikko AM Investment Grade Corporate Bond ETF, was for auction on SGX in August 2021. It mainly comprises bonds that are issued by government-linked companies, statutory boards, Singapore companies and foreign companies. On its factsheet, it states that its weighted average yield to maturity is at 2.29%.

Pros And Cons Of Corporate Bonds