* Record rebate in Singapore bond offering raises red flags
* Market players fear incentive structure could lead to
* 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."
REGULATORS ARE WATCHING
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
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
(Reporting By Kit Yin Boey; editing by Christopher Langner and