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Singapore – FAQs On The SGD-Denominated Corporate Bond Market.

22 April, 2014

 

Legal News & Analysis – Asia Pacific – Singapore  Capital Markets

 

We have compiled below a series of responses to questions which we frequently encounter in the course of advising our clients, and we hope that these will be useful for your planning purposes.

 

Q: Can A Non-Singapore Resident Company Issue SGD-Denominated Bonds? 


A: Yes, a non-Singapore resident company may issue SGD-denominated bonds. We have seen non-Singapore based businesses issuing SGD-denominated bonds, including Indonesian-incorporated companies issuing bonds through their respective Singapore-incorporated subsidiaries and Indian-incorporated companies issuing bonds through their respective Singapore-incorporated subsidiaries. 

 

Q: What About Transferring The SGD-Denominated Proceeds Outside  Singapore? 


A: Non-resident non-financial institution issuers of SGD-denominated bonds are not required to swap or convert their SGD proceeds into foreign currencies before remittance abroad. Only non-resident financial institution issuers of SGD-denominated bonds who want to use the proceeds outside Singapore must do so. 


Q: Do SGD-Denominated Bond Issuances Need To Have Documentation Governed By Singapore law? 


A: No, although many of such issuances are in fact governed by Singapore law. 


Q: What Mode Of Issuance Is Common In Singapore For SGD-Denominated Corporate Bonds? 


A: The most common mode of issuance for SGX-listed corporate issuers is through a Singaporean medium term note (MTN) programme. For other corporate issuers, including foreign companies whose shares are listed elsewhere, the mode of issuance is split between Singaporean MTN programmes, Euro MTN programmes and SGD-denominated standalone bond issues. 


Q: Is The Singaporean MTN Programme Similar To A Euro MTN Programme In Terms Of Documentation? How About The Differences In Expenses For Establishing A Singaporean MTN Programme?


A: Conceptually, yes. However, there are a quite a few differences in the contents or specific provisions of the relevant transaction agreements. Some of these differences are described below. In terms of expenses,the legal and SGX-ST listing expenses are typically less than for the establishment of, and drawdowns under, a Euro MTN programme.


Q: Are SGD-Denominated Bonds Rated? 


A: A substantial majority of SGD-denominated bonds (whether issued under a Singaporean MTN programme or on a standalone basis) are not rated. This is one of the reasons why there are differences in the terms of the transaction documents of Singaporean MTN programmes/standalone bonds as compared with Euro MTN programmes and U.S. SEC-registered shelf offerings (where a majority of issuers have investment grade ratings) or European, U.S. and USD-denominated Asian high yield bond markets (where issuers have below investment grade ratings). 


Q: Are Singaporean MTN Programmes Covenant-Light? What Are The Main Differences In The Terms And Conditions Of Singaporean MTN Programmes Compared With Euro MTN Programmes, U.S. Shelf Offerings Or High Yield Bonds? 


A: No, it is just that the covenants in Singaporean MTN programmes are contained in the trust deed, and not in the terms and conditions or “Description of Notes” section that is disclosed in the offering memorandum. 


Singaporean MTN programme terms and conditions typically contain maintenance-type financial covenants (i.e. various financial ratios have to be maintained throughout the life of the bonds). Additional maintenance-type business covenants are also typically imposed on issuers, but these are contained in the trust deed rather than in the terms and conditions. This is different when compared to high yield bonds, which contain incurrence-type financial and other covenants (i.e. covenants apply only when the issuer intends to incur certain types of liabilities or undertake certain transactions). 


In terms of events of default, Singaporean MTN programmes usually contain more events of default. Some of these may include (a) a breach of any of the representations, warranties and covenants given in not only the trust deed but also the other transaction agreements, including the programme/dealer agreement, or (b) ceasing or threatening to cease all or any part of its business or non-ordinary course of business disposals of the whole or any material part of its assets. Also, at first glance, some event of default categories in Singaporean MTN programmes will seem similar to those in Euro MTN programmes, U.S. shelf offerings or high yield bonds, but on closer inspection such categories are typically drafted wider to potentially be triggered earlier.

 

Q: How About Differences In The Other Transaction Agreements? 


A: The main agreement constituting the bonds is the trust deed (for Singaporean and Euro MTN programmes) and the indenture (U.S. shelf offerings and U.S.-style high yield bonds). There is also the programme agreement and the agency agreement (for Singaporean and Euro MTN programmes). 


Trust deeds in Singaporean MTN programmes are unique in that they contain various representations and warranties that are similar (and in addition to) those given in the programme agreement. These representations and warranties are repeated every day so long as any amount remains unpaid under any of the transaction agreements, and any breach of these is an event of default. In addition, trust deeds in Singaporean MTN programmes have various covenants that are in addition to the typical covenants contained in Euro MTN programmes, including some maintenance-style business-type covenants that may make it difficult to effect a merger or takeover of the issuer. 


Peculiar to the Singaporean MTN programme is the requirement for a deed of covenant giving direct rights to account holders of The Central Depository (Pte) Limited (CDP) (operator of the Singaporean securities clearing system) even in a trustee structure (for Euro MTN programmes, a deed of covenant is required only if using a fiscal agent structure). 


Q: Is The Process For The Listing Of Bonds On The SGX-ST Difficult?


A: Not at all, if the bonds are being offered solely to institutional or accredited investors. The process is simple and quick, typically no more than one week to obtain approval in-principle from the date of the listing application. 


Q: How Different Are The Disclosure Standards For Singaporean MTN programmes?


A: Where bonds are listed on the SGX-ST and are offered solely to institutional or accredited investors, there is no prescribed list of specific disclosure requirements for the offering document. In such cases, the SGX-ST’s requirements are that the offering document contains the information that such investors would customarily expect to see in such documents. In addition, under the Securities and Futures Act (Chapter 289) of Singapore, the offering document must not contain any statement that is false, misleading or deceptive in a material particular or omit to state a material fact necessary in order to make the statements made not misleading. In practice, we see a wide range of disclosure standards in offering documents for bonds listed on the SGX-ST. The SGX-ST has become a popular venue for the listing of debt securities, including non-SGD-denominated bonds. Some of these international bond offerings are rule 144A offerings (with extensive disclosure), some are Regulation S-only offerings and others are Singapore-only SGD-denominated offerings. The extensiveness of the disclosure document for Singaporean MTN programmes may not be as high as U.S. SEC-registered offerings, rule 144A offerings or even some Regulation S-only offerings.

 

Q: How About Clearing Systems For SGD-Denominated Bonds? 


A: Almost all Singaporean MTN programmes have provisions made for the clearing of bonds to be issued under the programme to be cleared in Euroclear, Clearstream, Luxembourg and CDP. There are differences in the way CDP operates as compared with Euroclear and Clearstream, Luxembourg. For example, CDP will not certify whether or not bonds cleared through them are held by persons who are not U.S. persons. 


Q: What Is The Typical Investor Profile For SGD-Denominated Corporate Bonds? 


A: As mentioned above, many SGD-denominated corporate bond issuers are not rated by any ratings agency. Therefore, a substantial majority of investors for these bonds are private banking customers who are accredited investors. Where corporate issuers are rated or where the corporate issuer is well-known and highly regarded (e.g., Singapore statutory boards or Singapore government-linked companies), the investor profile would likely also include institutional investors.

 

Stamford Law

 

For further information, please contact:

 

Sin Teck Lim, Director, Stamford Law

sinteck.lim@stamfordlaw.com.sg

 

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