DBS

By: Chris Kuan

The Swiber bond debacle is not the same as the mini-bond issue a few years back, even if DBS is involved in both. Not all high yield interest bearing securities are junk bonds (as claimed by an article published in The Independent Singapore (TISG) titled, “DBS helped sell junk Swiber bonds to public“).

The mini-bonds were a Lehman Brothers credit derivative embedded into a DBS note – the risk was always to the weakest part of the transaction (i.e. Lehman Brothers).

Therefore investors are far more at risk to Lehman even though the note is issued by DBS. I do not see a problem in distributing a straight Lehman Brother bonds to retail investors because the risk is clear. But the layering of risk in the mini-bond will not be understood by mom and pop, therefore ought not to be distributed to retail investors. This proved to be the case when Lehman defaulted.

On the other hand, the Swiber bonds were straight bonds. The risk is clear, no bells and whistles, like the mini-bonds. As several TISG readers have noted, being distributed to accredited investor with thresholds of income ($2m) and minimum certificate size ($250,000) is not the same as saying it is sold to the public.

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This is vastly different from the mini-bond issue. Regulatory safeguards for accredited investors are not the same as those for retail investors.

Nevertheless as I said yesterday in my article titled ‘DBS should be criticised for selling Swiber bonds to individuals‘, they ought not be sold to individual investors, even accredited ones, because the higher probability of default means one should not invest in one high yield bond but in a diversified high yield portfolio (i.e. a specialist high yield bond fund).

The mini-bonds investors were compensated to a certain extent by DBS and other banks. Whereas in the Swiber bond issue, any compensation received by investors will entirely be due to the recovered value of the bonds (if any).

Activism by accredited investors will most likely fall on deaf ears unlike those by the minibond investors.