The Thai corporate debt market is not for the faint-hearted; disclosure requirements are weak, credit ratings are hard to come by, the secondary market is highly illiquid and the country’s new bankruptcy laws are largely untested. Despite this, local investors, banks, institutions and retail, are clamouring for paper.
“There’s huge amounts of liquidity around and there’s a lack of bank borrowing so there’s lots of money in the system and not many places to put it. Investors are looking for high yields, so there’s lots of demand for local bonds,” says Mark Boyne, HSBC’s treasurer in Thailand.
While depositors want better yields than the 2% or so the banks are offering and the banks themselves are desperately in need of borrowers, financing for Thai companies should remain readily available in the local debt market. Ultimately, however, it is likely the market will require some foreign investor participation if it is to remain a credible source of financing in times when domestic liquidity is harder to come by.
Once bitten
The Bank of Thailand and the Thai Ministry of Finance are aware of this and are making the right noises about reforming the bond market, though there has so far been little in the way of concrete action. The slow pace of change is understandable in a country already burnt once by excessive overseas borrowings – albeit previously in dollars – and that is awash with domestic liquidity.
As history demonstrates, however, necessary reforms should be introduced when they are least required. Although the companies that have issued bonds since the height of the economic crisis have generally been of high quality by Thai standards, the strong demand for corporate paper and the lax regulatory requirements are likely to attract less solid companies.
At present, the documentation is typically drafted by one lawyer, representing both the issuer and the arranger, and this creates the potential for loopholes. This is fine as long as payments are forthcoming, but it is inevitable defaults will arise and uncertain documentation coupled with uncertain bankruptcy laws will lead to major problems down the road – problems which will likely severely curtail investors’ appetite for Thai corporate bonds and so restrict the country’s debt market as a source of financing.
“There is going to come a time when people are going to regret not having had more robust documentation,” says Boyne. “There seems to be the general attitude of caveat emptor – we’ll disclose as little as we can get away with and it’s up to the investor to read between the lines and if they decide they want to buy it then fine.”
Leading companies
To some extent the market is ahead of the regulators in terms of documentation, with the better quality issuers such as Shin Satellite and Siam Cement providing greater information than is required, but this does not yet apply across the board.
As things stand, few bonds or issuers in Thailand have credit ratings, although this is changing after legislation was introduced earlier this year requiring all bonds being sold through a public offer – available to those investing less than Bt10 million – to be rated by Thai Rating Information System (TRIS). TRIS is gaining credibility, but it’s methodology remains unclear and its resources are stretched.
Kunnigar Triyangkulsri, head of debt capital markets and liability risk management for Deutsche Bank in Thailand, says: “I’d like to see a second rating agency, more disclosure on corporate bond trading and a more complete government bond yield curve.”
Currently, there is only appetite for paper of five years maturity or less – what Thai investors perceive to be the long term - and within this timeframe liquid sovereign issues are fairly sporadic, making it hard to accurately price corporate debt. To build a more complete yield curve, market participants say they would like to see a more frequent, predictable level of issuance by the Thai government.
In addition to these changes, there are calls for changes to the taxation system, the introduction of hedging instruments, a more efficient settlement procedure and requirements for bond arrangers to make markets in the securities they issue.
