Jun 11, 2018

Hyflux Perpetual Securities Saga - Lessons to be Learnt

Hyflux, the once the poster boy (or girl) of Singaporean entrepreneurship has stunned the market by in May 2018 by applying to the court for bankruptcy protection in order to reorganize its debt. When the perpetual securities was announced in 2016 with an attractive interest rate of 6%pa, retail investors scrambled to subscribe to the bonds with its attractive yield. Lured by its status as a company that manages a strategic national resource and given endorsement by the government, investors piled into the perpetual bond thinking that it is a safe bet. Hyflux raised $500 million with an initial intention to raise $300 million. The default caught the retail investors by surprise, with some of them elderly folks who have invested their life savings into the bond, with little understanding the kind of risk they are taking on. With the securities suspended, this group of investors can no longer redeem their capital and can only pray that the government comes in and bail Hyflux out.

Government Backed doesn't mean it is Safe

One of the fallacy that Singaporeans have is that they place too much trust on companies that deemed to be protected by the government. For example, Noble group is invested by China's sovereign fund Chine investment corporation and still defaulted on their bond payment despite supported by CIC. Recently, the government rattled the widespread belief that the HDB is a "confirm make money" asset and they may let the lease on HDB run out, resulting in a wiping out of an essential retirement asset seen by many Singaporean.

HDB, once seen as a government guaranteed investment, is no longer seen as a safe bet.

As much as we want to place trust on securities that are backed by governments, political change and geopolitical risks can easily upend whatever assumptions investors have and turn a safe bet into a sour one. One good example is the political tsunami in Malaysia. Stocks of companies that are friendly to the previous administrations are knocked down while companies seen to be associated with the new government seen their share prices soar.

Diversify if you are Financial Illiterate about Bonds

One of the reason why the Hyflux saga became a human story is due to the fact that many mum and pop put their life savings into the bond. Retail bond, being a relatively new asset class in Singapore, is unfamiliar to many investors and is often mis-sold as a product comparable to fixed deposit in Singapore. This is something similar to the Lehman mini bond saga. Financial consultants should be the first line of defence to help investors understand the risk of such high risk bonds and should dissuade vulnerable investors from investing too much of their life savings into the product. Sad to say, many of those are lured by the promise of a big commission and probably has a hand in encouraging these investors to empty out their life savings as opposed to advising them to invest in a  well diversified bond fund. This observation is made base on a conversation with a friend whose elderly father invested his life savings into the Hyflux perpetual bond.

An investor who has invested in a Singapore bond fund with a small percentage of the fund size invested into Hyflux bonds will probably suffer as much damage as buying into an individual bond and investors can still have the chance to liquidate their funds even if one bond is suspended. 

A new Temasek linked bond - Astrea IV Bond 4.35%

As the damage of the Hyflux bond starts to ripple through the society, a new bond, Astrea IV Bond is
offered by Temasek, giving retail investors to gain exposure to private equity. Private equity is an investment into companies that are not listed on any stock exchange and is generally not easy to buy or sell. Imagine buying into Grab and Carosuell! However, we all know that many private equity companies fail, as testified by many angel investors and venture capitalist.

So from the lessons we have learnt from Hyflux and Noble, securities linked to the government are not as safe as people think and you should NEVER invest all of your money into a single bond issue unless it is explicitly guaranteed by the Singapore government, such as the Singapore Saving Bond.  
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