An answer to Singapore's default problem

When most people imagine Singapore they think of efficiency, clean streets, low crime and a lack of corruption. The spectre of debt defaults has not encroached on that image until now, or until a year ago to be precise, when a Singapore dollar bond issued by Indonesian telecoms merchandiser Trikomsel missed a coupon payment.

Since then there has been a stream of defaults from companies which issued debt in Singapore dollars and whose primary business was in the shipping or oil and gas sectors. Rickmers Maritime refreshed that story with a coupon miss at the end of November.

In the popular culture, debt default implies fraud, malfeasance or shoddy corporate management. But not in this case.

The Singapore defaults are the result of the confluence of three factors: the collapse of pricing power in shipping and oil and gas services; the US Federal Reserve’s ultra-low interest rates; and the surge of Singapore’s private banks.

Collapsing pricing power was the result of oversupply during the boom years, when China was buying up just about every commodity you could imagine. It is the resultant orgy of bank lending and bond issuance that is now going sour thanks to collapsing demand across the commodities sector.

Low policy rates, combined with quantitative easing in the US, generated the unintended consequence of pushing up the price of fixed income assets amid a global quest for yield. Local currency bond markets were major beneficiaries of this dynamic, and Singapore’s was no exception.

While this flow into debt, which yielded more than was available in more developed markets, was underpinned by cross-border flows, the same dynamic occurred in Singapore thanks in part to the city-state’s private banks.

Singapore’s private banking industry has thrived for around 30 years, but saw stratospheric growth in the years after the global financial crisis, propelled by the growing wealth of Asian individuals and their quest for a financial centre in a stable political location in which to park their money.

The private banking industry in Singapore has been on a super-charged hiring charge over the past decade-odd and there is logic to this hiring binge, as the pile of assets under management has grown exponentially.

But Singapore’s private banks have been aggressive with their sales approach and they have been helped in this effort by low Singapore dollar deposit rates, which are effectively tied - give more or less a standard deviation – to rates which prevail in the United States.

That means there has been an ongoing quest for yield among local retail investors in an attempt to better the parsimonious Singapore dollar rate available at the banks. And that’s where the bond market has come in. If you can book coupons in excess of 6% versus the 1% or so available on time deposits you will probably do it.

I can hear the sales pitch right now: “this is a major player in the offshore oil and gas industry [or shipping industry] and has never defaulted.”

That could have applied to any of the six companies which have defaulted on Singapore dollar bonds over the past year. But I’m not suggesting there was mis-selling of these bond products by the private banks. The companies were sound and also well run (and from what I hear continue to be). It’s just that their markets went bad and as a consequence so did their cashflow.

The question here is what happens next.

As with all defaults there are two options: seek a debt restructuring in which creditors agree to take a hit in the form of a haircut or a terming out. Or place the company into liquidation.

I’m certain that the first option is the one preferred by Singapore Inc. Liquidation on the scale implied by the defaults would take a bite out of Singapore’s oil and gas and shipping industries and open them up to foreign ownership. But if this is to be avoided, the multiple retail owners of the defaulted debt must get together and talk to each other about how to approach the restructuring process.

Most bond workouts are negotiated with a steering committee representing between 100-200 investors. In most of the Singapore cases, those committees would need to deal with 1,000-1,500 each, largely consisting of private banks clients and qualified retail investors, a situation which is broadly unprecedented on such a scale.

To allow orderly restructurings to take place, I suggest the Singapore government diverts some of its recently announced grants to appointing pro bono highly qualified debt advisory firms to coordinate with the retail creditors.

This will maximise the chances of orderly workouts and boost the chances that these companies will remain going concerns - without raising the kind of moral hazard that accompanies any direct government bailout.