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WorldOctober 2 2017

Thai corporates spread their wings

Ever since the Asian financial crisis in 1997, Thai companies have been steadily expanding abroad. They have been helped in no small part by their easy access to the capital markets, though often with a reliance on the large multi-national banks as opposed to their domestic counterparts. Peter Janssen reports.
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Charoen Pokphand Foods

Siam Cement Group (SCG), Thailand’s largest industrial conglomerate, was hit hard by the 1997 Asian financial crisis. Like most Thai companies at that time, SCG had not sufficiently hedged against foreign exchange fluctuations (the Thai baht lost half its value in a few months) and was highly leveraged. “After the Asian crisis, the balance sheet of the parent company looked so bad because we had acquired a huge foreign debt,” says Chaovalit Ekabut, SCG’s current chief financial officer.

In an effort to diversify financing away from only banks, the group offered debentures on one of its more profitable subsidiaries, instead of on the shaken parent company. “We were actually the first Thai corporation to issue debentures, just one or two years after the crisis,” says Mr Ekabut.

Twenty years later, debentures account for more than 80% of SCG’s outstanding debt. “It just increased to that level about four to five years ago,” says Mr Ekabut. “The debenture borrowing has increased year by year, slowly [since 1999] in accordance with the expansion of the group.” And SCG has expanded a lot over the past six years, especially overseas. It has been in the vanguard of corporate Thailand’s expansion spree abroad, focused primarily on opportunities in the Association of South-east Asian Nations (Asean) region. SCG’s Asean assets (excluding those in Thailand) amounted to Bt137bn ($4.1bn) or about 23% of the group’s total assets as of June 30, 2017. 

M&A surge

Thai firms have led the mergers and acquisitions (M&A) wave in Asean for the past decade, driven across borders by record low interest rates, a strong baht and diminished growth prospects at home. Thai direct investments abroad amounted to Bt1900bn ($57 bn) between 2011 to 2016, peaking at Bt505.1bn in 2016, according to Bank of Thailand figures. SCG’s latest acquisition was Vietnam Construction Materials for $440m in the first quarter of 2017. The group now has Bt166bn in debentures outstanding. SCG is considering a long-term US dollar loan to finance another recent acquisition in Vietnam (Lang Son Petrochemicals), but will keep to its target of a net debt/earnings before interest, tax, depreciation and amortisation ratio of 2.5 times, according to Mr Ekabut. 

There are many reasons why Thai corporations have surpassed their Asean counterparts in spreading their wings abroad. First, over the past three decades the domestic economy has nurtured an impressive list of Thai multi-nationals such as SCG; national petroleum company PTT; Thailand’s largest agro-industry group Charoen Pokphand Foods; the world’s leading canned tuna exporter, Thai Union Group; leading producer of alcoholic and non-alcoholic drinks Thai Beverage; sugar producer MitrPhol Group; mining and energy giant Banpu; and global chemicals company Indorama Ventures. 

The Stock Exchange of Thailand (SET) has been actively encouraging its listed firms to expand abroad, relaxing regulations in 2015 to facilitate the listing of foreign affiliates. “Thailand is small. We have only 67 million people, so how could these companies grow within a small country if they are really good?” asks Pakorn Peetathawatchai, head of the corporate strategy and finance division at the SET. The trend is good for the SET and investors too, he argues saying: “The investor can have an opportunity to invest not just in Thailand but overseas through the investment in these companies.”

At the end of 2016 198 listed firms on the SET were investing overseas, 78% of whom were investing in the Asean region. Last year their total overseas foreign direct investments amounted to Bt180bn, more than double the Bt75bn reported in 2015. The outflow trend does not worry SET officials. “If you look at the debt/equity ratios of the Thai companies at the moment, it is still very low, so if they want to find new opportunities I think they could look into it,” says Mr Peetathawatchai.

Thai Union the pioneer

Those low debt/equity ratios could be attributed, in part, to lessons learned from the 1997 crisis, which ultimately laid the groundwork for the Thai corporate expansion abroad. “Thai companies, maybe as a result of the 1997 financial crisis, became resilient and adopted very strong, stability-oriented and conservative financial strategies for a very long time,” says Joerg Ayrle, chief financial officer at Thai Union Group. “Suddenly you have companies [paying] low interest rates, with a strong balance sheet that have kind of topped out on the local market so they said: ‘Let’s go international, let’s deploy the balance sheet through international acquisitions.’ And I think Thai Union was one of the first to do so.”

Thai Union’s M&A spree began in 1997 when it bought a 50% stake of the Chicken of the Sea canned tuna brand in the US for $97m. The stake was upped to 100% in 2001. In 2010, Thai Union made its big move in Europe, buying out France’s MW Brands – one of the largest canned seafood manufacturers in Europe, owner of brands such as John West, Petit Navire, Parmentier and Mareblu – for €680m. “This was a game-changing acquisition for Thai Union,” says Mr Ayrle. “The company had to go back to the capital market and raise equity twice with Thai shareholders. Part was funded by debentures, and a complex structure with convertible bonds was put together by Standard Chartered Bank.” Between 2010 to 2016, Thai Union, which was listed on the SET in 1994, spent about $2bn on overseas M&A.

The canned seafood giant was one of the first Thai conglomerates to set up a treasury centre in Bangkok under a package of incentives the government offered in mid-2015 in a bid to enable Thailand to compete with Singapore and Hong Kong as a hub for international headquarters. So far the Bank of Thailand has issued 22 treasury centre licences, mostly to Thai and Japanese multi-nationals with large manufacturing bases in the country.

Having a treasury centre allows Thai Union’s Bangkok headquarters to act as an in-house bank, pooling cash from its overseas subsidiaries at night and distributing it every day according to their financial needs. It has reduced the group’s idle cash from $65m daily to $20m, says Mr Ayrle. It also gives Thai Union more clout when dealing with banks. For example, in 2016’s $575m purchase of a 25% stake in Red Lobster Seafood Company, the world’s largest seafood restaurant chain, Thai Union arranged direct loans from Thailand-based Japanese banks. “We placed $300m with a small group of Japanese banks, and the cost was marginally higher than a bond placement,” says Mr Ayrle. Usually such a deal would be arranged by another bank, but with its treasury centre in place, Thai Union took the lead. “We did it ourselves,” says Mr Ayrle.

Local incentives

Thai authorities were partly prompted to enhance the tax incentives and other privileges offered to local and foreign multi-nationals opening international headquarters and regional treasury centres in Bangkok by the national petroleum company, PTT, which opened a regional treasury centre in Singapore in 2013. The Thai incentives were only enhanced in mid-2015, too late to catch PTT’s business. “To set up a treasury centre in Thailand while our regional treasury centre in Singapore still exists would not be an appropriate solution in terms of costs benefits and efficiency of operations,” says PTT chief financial officer Nitima Thepvanangkul. “However, in the longer term, a treasury centre in Thailand is considered part of our journey to reach our financial aspiration of having a PTT in-house bank in 2020.”

With total assets of $67bn, PTT ranks as Thailand’s largest corporation and the biggest single stock on the SET, which it joined in 2001. With some 300 subsidiaries and investments in 20 different countries, the company has set a long-term target of earning 25% of its revenues from overseas operations. To finance its expansion abroad it has relied heavily on debentures. “Since 2001, PTT has raised money through the capital markets and we have issued more than 40 series of bonds to Thai and foreign investors, equivalent to $10bn, and taken $1bn in loans from financial institutions,” says Ms Thepvanangkul. “Currently, the PTT portfolio between bonds and loans is 80/20.”

CPF, the main listed company of Thai agro-industry giant Charoen Pokphand, has also chosen equity and corporate debentures as its main means of financing its expansion abroad. “Over the past decade we expanded our business footprint though cross-border M&As to more than 10 countries worldwide, with total deals worth Bt140bn,” says CPF chief financial officer Paisan Chirakitcharoen. “In general, we financed our external expansion by internal cash flows within the CPF Group and through corporate bonds. There are currently 30 series of debentures with a total issuance value of Bt145bn,” he adds. CPF also recently issued a rights offering on the SET, raising equity capital of Bt21.7bn for debt repayment and to boost reserves for future expansions.

The role of banks

Thai banks appear to have played a secondary role in financing corporate Thailand’s outward flow. “In terms of international funding, for trade operations, import/export, absolutely,” said Thai Union’s Mr Ayrle. “That’s the sweet spot of the Thai banks. Rates that you would not get anywhere else, amazing support.” Thai banks are also adept at providing bridge loans, according to Mr Ayrle. “But once you start with more complex foreign exchange products, [they are] not as great. And if you go into bond issues, we raise most of our bonds through HSBC here in Thailand. The last one we placed with Krungsri Bank, which is now a Japanese bank,” he says. Krungsri Bank, also called Bank of Adyudha, was bought out by Japan’s Mitsubishi UFJ Financial Group in 2013 for $5.3bn.

Thai banks do better with Thai bonds, however. “In the Thai market, if the bond is in baht, I would say the Thai banks are very good at that,” says the SET’s Mr Peetathawatchai. “They are less competitive in the foreign currency bond market. Banks such as Citibank, HSBC and JPMorgan are stronger on US dollar or foreign currency bonds.” The Thai bond market is huge and getting bigger, with an estimated Bt3000bn outstanding in corporate debentures and Bt7000bn in government and central bank bonds, Mr Peetathawatchai estimates.

There are good reasons why Thai banks are not competitive in foreign exchange-related products. “The Thai banks are inherently less competitive in foreign currency lending than the major foreign banks because their international ratings are much lower, hence their funding costs are higher,” says Parson Singha, Fitch Ratings’ Thailand banking expert. Thailand’s leading corporations, which also have good international ratings, may not need the Thai banks, but for the vast majority of medium-sized Thai corporations that need foreign currency funds, Thai banks remain a good option. Overall, Thailand’s banking system extended loans abroad worth $24.9bn in the second quarter of 2017, an increase of  about $10bn from five years ago, according to Bank of Thailand data.

Looking ahead

One lesson for Thai banks from the expansion of Thai companies abroad is that they may need to do more to prepare for increasing competition from other sources of funding. “Our ultimate goal is to be an in-house bank for PTT Group to optimise utilisation of funds internally and to be more 'operations efficient',” says PTT’s Ms Thepvanangkul. “Moreover, with upcoming digitalisation, fintech and blockchain technology, we believe these could possibly put more pressure on banks and make them less competitive in providing corporate financial services.”

Thailand’s aspiration to become more of a regional financial hub, fed by developments such as the establishment of more regional treasury centres, offers both challenges and opportunities for the banking system. “Thai banks have to improve, they have to provide new products,” says the SET’s Mr Peetathawatchai. “To me that is an opportunity, because if these Thai companies set up in Singapore they are not going to use Thai banks, but if they set up here it’s an opportunity for Thai banks to compete for services.”

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