The deal, led by sole bookrunner Merrill Lynch, priced on Tuesday night at par with a coupon of 7.462%, a spread of 260bp over comparable US Treasuries or 210bp over mid-swaps. But hours later when Prime Minister Thaksin Shinawatra was ousted in a bloodless coup d'etat, the deal, along with other Asian bonds, traded out almost immediately.
The new deal traded 30bp wider initially, but by the end of trading on Wednesday the bonds were quoted at a bid/offer spread of 300bp to 270bp over Treasuries or 271bp to 244bp over swaps. On a cash basis, it was quoted at 98.08% to 100.19%.
The events unfolding in Thailand leave sole bookrunner Merrill Lynch in a rather precarious situation.
The Thai government owns 56% of Krung Thai and is a major source of the bank's revenue. Krung Thai serves a total of 225 government ministries, departments, agencies and branch offices and holds more than Bt339.9 billion ($9 billion) of government deposits. While government lending accounts for 5.2% of its total outstanding loans.
The government disburses a large portion of its payments through its Krung Thai accounts. More than 1.4 million of ThailandÆs approximately 2 million government and state-owned enterprise (SOE) employees have their paychecks deposited in accounts held with Krung Thai.
Additionally, the bankÆs borrowers also include SOEs and their subsidiaries, such as PTT, PTT Exploration and the Electricity Generating Authority of Thailand.
Merrill Lynch was careful enough to include the inherent risks in the stability of Thailand's government in its offering circular. The circular states: ôA number of factors could cause actual results or outcomes to differ materially from those expressed in any forward-looking statement. Such factors include, among other things, general economic, political and social conditions and developments in Thailand and Southeast Asia.ö
However, the deal's sudden volatility still leaves investors waiting for some direction from the borrower and the lead manager in terms of what will happen next.
To the best of the market's knowledge, a bond has never priced just hours before the standing domestic government has been overthrown, so Merrill has no precedent on which to rely.
As the deal has not yet settled û it has a T+5 settlement û there is some risk that original investors may simply refuse to pay up the bond. However, most believe this is highly unlikely to occur.
Merrill really has only two viable options. It can negotiate with both the issuer and investors opting to invoke the clause of force majeure and cancel the transaction outright. Despite common perception, force majeure does include extraordinary events such as war and strike, and should no doubt include military coups. Or Merrill can choose to support the deal in the secondary markets in the hope that its trading levels and the situation in Thailand stabilise quickly.
If the deal is to be cancelled, Merrill will have to ask the respective clearing systems to negate any and all trades and effectively unwind the transaction before the settlement date. As of Wednesday, there had been no announcement as to what will happen with the transaction, leaving the investors in a state of uncertainty.
ôThe parties need to act quickly with this,ö says one Singapore-based investor. ôNobody seems to have any idea what is happening.ö
However, as the market returns to pre-coup levels and the uncertainty regarding the future of the government becomes a little clearer, it may be likely that Merrill will seek to leave the deal as is.
ôObviously almost every asset class in Asia traded out initially, but as it becomes clearer that it was a peaceful transition and people aren't being shot in the streets, I think a level of normalcy will return sooner rather than later,ö said one observer.
The likelihood of a quick return to stability was further strengthened by the affirmation of Thai bank ratings from Standard & PoorÆs. The agency states: ôThe likelihood of a downgrade arising from possible systemic events, such as a moratorium or business disruption, is less than one-third. Nevertheless, if prolonged political instability leads to an economic slowdown and a more difficult operating environment, the ratings or outlooks on the Thai banks could come under downward pressure.ö