* Record rebate in Singapore bond offering raises red flags
* Market players fear incentive structure could lead to misuse
* Regulators are monitoring the practice
By Kit Yin Boey
SINGAPORE, March 14 (IFR) - Rebates given to private banks to encourage them to invest in bond offerings came under the spotlight again last week after small cap issuer Amtek Engineering’s debut in the Singapore dollar bond market.
Amtek shelled out S$1 for every S$100 bond sold to draw private banks to its S$200m 6.90% five-year non-call three bond on Tuesday. DBS Bank and Standard Chartered Bank were the transaction’s joint bookrunners.
Such incentives are meant to encourage private banks to buy bonds for their high-net worth clients, and they have become a standard practice in Asia’s offshore bond markets.
The amount Amtek was willing to pay this time, though, was outsized compared with previous rebates. Typically private bank rebates range from 25 cents for well-known credits to 50 cents for less popular names.
Institutional investors were stunned by the S$1 amount.
“This is serious and an important trend to note,” said one buyside investor. “A dollar (for every hundred they sell) - that is crazy. The government should do some clamping down.”
While private bank concessions are common, a sharp rise in their size is raising concerns among more seasoned institutional investors. They worry that the rebates essentially will create an incentive to allocate excessive risk to high-net worth investors who may not be as fully aware of the potential pitfalls of these investments.
Because of this concern, the Hong Kong-based Asia Securities Industry & Financial Markets Association (ASIFMA) is recommending a regional standardisation. Their intent is to create complete disclosure of private bank rebates to investors.
The trade association, however, only has discussed the issue of requiring full disclosure, and has not said it would address questions over the size or legitimacy of the rebates. Bankers, analysts and even investors are cagey about speaking publicly against the practice.
“Institutional investors don’t really suffer from the lack of rebates,” said a trader. “But a level playing field, or a less skewed one, would be nice.”
As they are structured now, rebates are paid to the private bank itself, not to the retail client. One analyst said it would be illegal to pass on the savings to the client, in fact.
“That would beat the purpose of having a fixed price reoffer,” and would effectively mean private banks were being given higher yields for the bonds, the analyst said.
Still, the practice could easily lead to misuse. When bidding for the bonds, private bankers may be motivated by the rebate rather than by the suitability of the asset for the client, said the trader.
The analyst added that all it takes is for a deal sold to a wealthy client from a private bank that received a rebate to default and the whole system would be seriously questioned. Private banks would be the first ones facing the ire of investors, he said. “They will be in the frontline.”
Hong Kong regulators require private banks to divulge any rebates or commissions. A Hong Kong Monetary Authority spokesperson said the disclosure is made on a transaction basis, verbally or in writing, and is provided to the client prior to or at the point of sale.
In August 2013, the regulator reminded banks to prudently and robustly assess the risks in high-yield bonds to ensure their suitability for any customers.
There is no hard and fast rule on such requirements in Singapore. The regulators appear to be keeping an eye on the rebate situation, however.
Market sources close the central bank said the Monetary Authority of Singapore was aware of the situation, and could be already monitoring the situation for consumer protection. But that may not ultimately result in similar rules as in Hong Kong.
Under Singapore regulations, though, bankers are required to make their clients go through a rigorous survey that defines their risk profile and declares that they understand the risks of investments made through the bank.
In the case of Amtek, the Singapore-listed precision engineering company was willing to become only the second issuer in the island republic in recent years to pay such a high concession to ensure a successful deal. Miclyn Express Offshore paid a similar rebate in a S$150m three-year 8.5% deal last November.
Amtek,with a market capitalization of about S$350m, initially targeted a deal size of S$100m-$150m. The company is in the midst of acquiring US-based Interplex for US$210m.
While the company may need the funds, its willingness to fork out a chunky 1% concession, which adds up to more than S$1.75m in payments to private banks, revived concerns over a worrying trend. (Reporting By Kit Yin Boey; editing by Christopher Langner and Abby Schultz)