IFR Asia: Southeast Asia debt capital markets guide – Thailand

IFR Asia Southeast Asia DCM report – Thailand chapter

December 2009

The Thai baht debt capital markets have enjoyed a year so vibrant it’s as if the global financial crisis never happened. According to ThomsonReuters data, by November 19, Bt304.36 billion had been raised in local currency bonds in Thailand in 2009 over and above government issuance – well up on Bt198.31 billion for the whole of 2008 and Bt182.73 billion for 2007.

“2009 has been beyond everybody’s expectations,” says Surabhan Purnagupta, head of investment banking at Bangkok Bank.

Why the increase? Part of the reason is a peculiarity of the Thai market: the power of the retail investor base. “Retail buyers have become very important players in the market,” says Surabhan. “They are seeking alternative investments to their deposits, as the bank deposit rate has become very low.  They’re becoming more and more familiar with corporate debentures.” Bank deposit rates plunged as the Bank of Thailand cut policy rates through 2008 and 2009, from 3.75% in mid-2008 to 1.25% by May this year, and although economists have started to project modest rate rises in early 2010, investors have spent much of 2009 looking for a better return than the 1.5% they can typically get for a two-year deposit with banks today. Contrast this with the 3.2% offered on the three-year bonds sold by PTT, the country’s darling credit, in April; or the 3.5% on two-year paper from Toyota Leasing Thailand, which is rated AAA, in February (although rates were still declining at that stage and had not bottomed). Corporate debentures have particular appeal since government yields on short dated bonds have fallen hard too, paying as little as bank deposits.

This marks a shift in the investor landscape. “It has changed a little bit,” says Thiti Tanthikulanan, capital market business head at Kasikorn bank. “In 2007 and 2008 it was mainly financial institutions who subscribed for bonds. This year it has been retail investors.  This year the credit spreads have been quite volatile, very wide at the beginning of the year but narrowing quite quickly as the year went on. So demand from financial institutions has been diverse and uneven.” Retail, needing the yield, has more than compensated.

Retail is easy to reach in Thailand: now that customers are familiar with the corporate debenture product, they buy the bonds in their local branches. On the day IFR Asia calls Bangkok Bank, it is the first day for subscriptions for a new issue of up to Bt8.4 billion in senior debentures for Charoen Pokphand Foods, for which Bangkok Bank is an underwriter. “Retail investors can just go to their bank branch and subscribe,” says Surabhan. This is one reason the primary market is vibrant but the secondary market lacks liquidity. “The people who invest in corporate bonds normally tend to hold them until maturity.” He reckons retail represents more than half of the market, and has been involved in some deals, such as the Bt12 billion multi-tranche issue for Skytrain operator Bangkok Mass Transit System in July, in which retail made up more than 80% of the deal.

This is also a reason that domestic bonds in Thailand tend to have a large number of lead arrangers – it increases the ability to reach as many retail investors on the ground across Thailand. PTT’s Bt35 billion issue in July, for example, credits 11 bookrunners – not just local leaders like Bangkok Bank, Siam Commercial Bank, Krung Thai Bank, Kasikornbank, Siam City Bank, TMB Bank and Bank of Ayudhya, but dedicated securities houses Thanachart Securities and TISCO Securities, and foreign-owned houses Standard Chartered Bank (Thailand) and CIMB Thai Bank. The sense is of using every possible avenue to reach the ordinary investor.

One also sees the retail influence in deal structure. Many of the biggest deals this year have come with multiple maturities. The Bangkok Mass Transit System issue, although it uncharacteristically had only two bookrunners in Bangkok Bank and Standard Chartered, came with five separate maturities – three, four, five, six and seven years. This was partly a retail strategy. “Normally in the market people say that if you issue three and four year tranches for sale at the same time, they cannibalise each other,” says Surabhan. “I didn’t believe that, and so we went out with three to seven year bullets and it proved successful. If you are retail and you want five years you take five, if you want seven you take seven; but if you want an amortising nature, you buy the three, the four and the five tranches at the same time, or all of them.” The strategy proved sufficiently successful to upsize the deal to Bt12 billion from Bt10 billion; not bad for a company emerging from restructuring and seeking to pay off hefty floating rate debt. “It was two times oversubscribed for a company that was only recently out of rehabilitation,” says Peng-Meng Ling, managing director and regional head of capital markets for southeast Asia at Standard Chartered. “It was a classic case of putting in the hard work in educating investors: after they learned to appreciate the credit they were willing to come back and invest in this paper.”

Some issuers have taken greater advantage than others in this environment, but none more so than the PTT group. In February the parent, PTT, issued Bt15 billion of eight-year paper. Another arm of the company, PTT Aromatics & Refining, raised the same amount in April, this time at five years. Then came PTT Exploration and Production in May, which raised Bt40 billion in the country’s biggest single deal of the year, in four tranches, at three, four, five and 10 year durations. So, seeing the attitude, the parent came back again: PTT raised Bt35 billion in July at three, seven and 10 years. In total, that’s Bt105 billion group-wide in five months – and more than one third of the national total for the whole year to date.

Unsurprisingly bankers consider the PTT deals the most significant of the year, “just because of the size of it,” says Thiti. “It wasn’t hard to do, because the name is so good and because at the time interest rates were quite low with not much prospect of recovery. So the bond was a very good alternative investment for financial institutions and retail investors.”

For issuers of PTT’s cachet, there is liquidity up to 10 years and beyond, though the bulk of corporate debentures come in the three to six year range. For lower-rated or less well-known issuers, access is tougher, though there have been signs this year of interest in names below the top tier. CH Karnchang is rated BBB+, and sold a Bt2.5 billion issue of three and five year paper earlier this year at rates that don’t seem excessive on a world scale: step-up rates from 5.3% to 6.3%.

One surprising thing about the success of corporate deals is that they have also had to compete with a sale of government savings bonds by the Ministry of Finance, that took Bt80 billion out of the market in mid July in a deal so popular it was fully subscribed within hours and upsized from its original Bt50 billion; and a Bt130.7 billion retail savings bond raising by Bank of Thailand in September, more than doubled from its original target, which attracted 60,000 retail investors. The Ministry of Finance may well be back again before the end of this year. 

Bank issues have been less noticeable, although they have been present: Krung Thai Bank raised Bt20 billion in February, and Kasikornbank Bt 600 million in a lower tier two issue. At the time of writing Thanachart Capital, a holding company for Thanachart Bank among other things, was due to launch a Bt10 billion five-year issue, and KrungThai Card, Thailand’s largest card issuer, was finalising a four and five-year raising. Other bond issues in the works at the time of writing were ThaiCom, formerly known as Shin Satellite; and Toyota Leasing (Thailand), a regular issuer in baht. One puzzling trait, though, is that the Bank of Thailand is believed to have refused approval for a number of foreign issuers in baht in recent months, although market participants seem to expect these approvals to be granted in 2010.

Quite apart from retail demand, there are other reasons it makes sense for companies to issue debt. “Most are trying to lock into the yield curve, with the risk of the BOT’s policy rate being either flat or rising in the coming months ahead,” says Somphan Eamrungroj at Export-Import Bank of Thailand. “Personally, [I feel] the yield curve has risen during the last two months too fast so may incur some corrections in the weeks ahead. The BOT has been passively trying to keep the policy rate stable amid their FX interventions to stem the strengthening of the baht, causing them to absorb the surplus baht out of the system.” Still, he says Thai Exim is “watching the market closely as we have some refinancing needs emerging in 2010.”

Additionally, the threat of the global financial crisis added an incentive for issuers to raise funds when they could. “At the end of 2008, a lot of corporates were concerned about the liquidity in the system and whether banks would still lend money,” says Thiti. “They saw what was happening in the US, where banks weren’t lending, and were afraid if that might happen in the Thai banking system as well. So corporates issued bonds to make sure they had liquidity going into 2009.” Then, with interest rates dropping through the first quarter, the attraction grew.

Has the surge run its course? “The pipeline is looking a bit thin at the moment,” says Thiti. “People who wanted to issue have already done so. Going into 2010 we think the volume will not be as large as in 2009.”

Still, the long term looks promising, and is attracting foreign banks despite the political uncertainty. CIMB pushed into Thailand when it became the largest shareholder in Bank Thai in 2008, rebranding it CIMB Thai Bank in May 2009. “The recently announced master plan [launched by the Bank of Thailand in November to cover the development of the financial sector over the next five years] placed a lot of emphasis on the bond market,” says Thomas Meow, head of debt capital markets for CIMB overall in Kuala Lumpur. “We believe there are a lot of opportunities there.”