Thailand is in the middle of its own version of ‘Big Bang’, the liberalisation of London’s financial market in 1986. The Thai government has recognised the need for more fully developed capital markets and is putting in place the necessary laws and infrastructure.
April will be a critical month, with the establishment of a new futures exchange alongside the further modernisation of the bond market. The Thai Futures Exchange (TFEX) will launch its first product, the SET50 Index Futures, on April 28, which also happens to coincide with the start of the stock exchange’s fourth decade.
Expanded role
The aim with bonds is to replace a largely over-the-counter market with a fully functioning market centralised on the Thai stock exchange (SET). To this end, the Thai Bond Market Association (Thai BMA – previously known as the Thai Bond Dealing Centre) has already sold its electronic trading platform to the SET has expanded its role as an information centre and self-regulatory organisation. From April, settlement of both government bonds and corporate bonds will be centralised on the Thai Securities Depository.
“The absence of a bond market can be very dangerous to an economy, as Thailand discovered during the financial crisis in 1997,” says Thirachai Phuvanatnaranubala, secretary general of Thailand’s Securities and Exchange Commission. “When foreign banks started to lose confidence and stopped lending to local banks, credit in the system dried up. Goods were being bought and sold for cash only. If there had been a bond market back then, bonds could have been sold and liquidity injected into the system. We need to develop a bond market in which foreigners have sufficient confidence to invest and take on the currency risk and in which local companies can raise long-term funds.”
Investment banks in Thailand say that there has been a trend among Thai corporates to raise funds both locally and overseas following their post-crisis absence from the market.
“Over the past three or four years, with interest rates at very low levels, companies with good credit standings and track records have been able to tap the bond markets,” says Phumchai Kambhato, executive director and head of investment banking at UBS in Bangkok.
“Bank lending guidelines have been tightened and if a bank’s exposure limits [to a particular credit] have been maxed out, companies must look at alternatives. While previously the market was dominated by government and state enterprise bonds, we have been seeing a spate of corporate bonds from bills of exchange to longer-term debenture issues.”
The average issue size tends to be about Bt1bn-Bt2bn ($25.5m-$51m) with maturities of three to five years – often three years fixed and two years floating. Last year, Thailand’s energy giant PTT managed a 15-year issue and Banpu did one of seven years.
Issuance could slow slightly in the future, with interest rates rising and high oil prices sounding a note of caution even though Thailand’s economic growth prospects are unlikely to be dented.
Sustaining momentum
The Thai BMA, keen to keep up the momentum, has launched a campaign to encourage companies with assets of more than Bt1bn to issue corporate bonds rather than take out loans. The association is hoping for 40%-50% growth in the market this year.
“If a company wants to raise Bt2bn-Bt3bn, the cost of issuing bonds is around 0.4%. The larger the bond issue, the lower the cost to the issuer,” said Nattapol Chavalitcheevin, president of the Thai BMA, in a recent statement. Last year, the total value of all bonds issued was Bt1960bn and total outstanding borrowings were worth Bt3300bn.
“There is a will to develop the local debt market and there has been co-operation among the authorities to allow international organisations, such as the Asian Development Bank and the Japan Bank for International Co-operation, to issue in baht,” says Gary Newman, head of corporate and investment banking at Citigroup in Bangkok.
“If Thailand opens up to more issuance of this kind we have a lot of overseas customers who would be interested in issuing here. It would be a play on the swap market, with the proceeds being swapped back into their own currencies, but they could achieve lower than usual borrowing costs depending on swap rates.”
Supportive banks
The major Thai banks – which are the traditional lenders and have the most to lose from growing bond market issuance – are also in favour of the market’s development.
“There is considerable room for development of the debt market,” says Chartsiri Sophonpanich, president of Bangkok Bank and chairman of the Thai Bankers Association. “It can be looked upon as sharing some of the loan growth with the bond market but in the long run it’s healthy because of the information shared with the public that provides another form of control [corporate governance]. We, at Bangkok Bank, have been focusing on the corporate finance and investment banking side of the business and of course, with our branch network, we have the ideal distribution network for funds and products.”
Thailand’s capital markets may also benefit from the government’s Megaprojects Programme, a huge infrastructure initiative that will cover everything from roads to water supply to education. As the government is keen to limit its public debt to 50% of gross domestic product (GDP), Megaprojects will have to be achieved using public-private partnerships and structured finance techniques.
Megaprojects link
“There is considerable scope to link the financing of Megaprojects with further development of the domestic capital market, especially through the avenues of bond issues and securitisation,” said Jean-Pierre Verbiest, Thailand’s country director at the Asian Development Bank.
“Over the longer term, only an efficient and properly functioning banking sector and capital market can sustain large-scale infrastructure financing. The capital market should provide the necessary depth of instruments and maturity profile to meet the complex and protracted term requirements of infrastructure projects, which typically have very long gestation periods.”
Citigroup did the first securitisation of credit card receivables in Thailand and is anticipating more of this kind of work as well as Megaprojects-related business. The first mortgage-backed deal should also be done this year.
“With the insistence on funding the Megaprojects without raising debt above 50% of GDP, securitisation and other financing techniques will be an important part of the funding solution,” says Citigroup’s Mr Newman.
Thai companies have a renewed hunger for international finance after losing their appetite following the financial crisis, when a sharp drop in the value of the baht left them exposed to high-cost dollar liabilities. “We will begin to see more Thai companies venturing out to tap dollar funding, probably exchanging a portion back into baht and hedging the rest,” says UBS’s Mr Phumchai.
Some Thai companies are still avoiding offshore borrowing and keeping their debt/equity ratios at a conservative one-to-one ratio. Ironically, investors are urging them to leverage up. Maybe if they do so in the domestic market, both issuers and investors will be satisfied.
