Thailand gears up for international bond bonanza

For the first time since 1998, the Thai government has become serious about setting new benchmarks in euros, dollars and yen.

In an interview with FinanceAsia, Sommai Phasee the Ministry of Finance's deputy permanent secretary says that the Kingdom is preparing to make 2002 the year it returns to the international bond markets. Phasee comments that Thailand is finalizing a $1.5 billion international capital markets quota for 2002, with plans for bond deals in yen and dollars, as well as a possible euro-denominated issue.

He states that the first of several deals could come as soon as March, with about 40% of proceeds being on lent to State Enterprises. This level of prospective fundraising will mark a huge increase over 2001, where a couple of aircraft financing related deals have generated roughly $300 million. There is also a prospective Y38 billion ($300 million) Samurai in the works, although its fate remains uncertain after the MOF failed to send out RFP's (Request For Proposals) following a weakening of sentiment in Japan.

A number of investment banks have been intensifying their pitches to the Ministry over the past couple of months, although many remain wary about the sovereign's true commitment after such a long absence and previous foot dragging. Since the Asian financial crisis, the Kingdom has only issued once in Yen (a Citibank-led private placement Shibosai under the Miyazawa plan) and never in dollars.

Its last $600 million deal of April 1997 is renowned for being one of the most illiquid Asian benchmarks and bankers have been pushing for a replacement for a number of years. In the spring of 1998, the Kingdom put out the initial soundings for a $1 billion to $1.5 billion global bond, unofficially mandating Goldman Sachs and UBS Warburg for a deal it would never publicly confirm until it announced its cancellation in September of the same year.

Bankers close to the sovereign comment that there is one overriding reason why Thailand is planning to re-access the international markets in 2002 and why it will see the plan through this time. "Next year is going to be a record breaking one for government fundraising and the sovereign doesn't want to put pressure on the domestic yield curve, or crowd out corporate borrowers even though domestic interest rates are still very low," says one banker.

"The majority of the money will be sourced domestically, but the sheer size required makes it prudent to raise some offshore," he adds.

A second also notes, "In his discussions with us, Khun Sommai has made his worries about a deterioration in the fiscal picture quite clear. There's also some foreign currency re-financing that needs to be done and it makes much more sense to raise the money ahead of the market knowing you really need it."

In total, Thai experts believe that Bt660 billion ($14.8 billion) will be needed next year, of which Bt220 billion will fund the government deficit, Bt120 billion ($2.68 billion) will be on lent to State Enterprises and Bt320 billion ($7.1 billion) will cover the losses of the FIDF (Financial Institutions Development Fund). These figures exclude T-bill issuance.

The last time the government came close to raising anywhere near this amount was 1998 when it raised Bt502 billion ($11.24 billion), of which government bonds accounted for Bt400 billion, State Enterprises Bt47 billion and the FIDF Bt55 billion. In 1999, a total of Bt399 billion was raised, dropping to Bt206 billion in 2000.

For the first six months of this year, some Bt 201.5 billion has been raised, of which government bonds account for Bt66.5 billion, State Enterprises Bt32 billion and the FIDF Bt104 billion.

Should the government proceed with its plans in full, it will, however, be in danger of breaching its 60% debt to GDP limit. As of June 2001, outstanding government debt (including the FIDF and State Enterprises) amounted to Bt2.84 trillion ($62.7 billion), a debt to GDP ratio of 55.3%. Of this amount, foreign debt accounted for Bt874.4 billion ($19.5 billion).

The government's past efforts to prop up the financial system and the aggressive pump priming it has promised for the year ahead has, therefore, resulted in a huge increase of public sector debt, which stood at only Bt535.2 billion ($11.98 billion) back in 1996.

"The government has two main issues to deal with next year," says one banker. "The budget deficit is going to double as it tries to revive the economy and as it has also promised, the Bt775 billion ($17.35 billion) in losses incurred by the FIDF will begin to be crystallized. The government believes there is about Bt500 billion of liquidity trapped in the domestic banking system. How to tap this effectively will be the key challenge."

Where an international dollar bond is concerned, consensus opinion prices a mid-sized issue of about $500 million to $750 billion inside Malaysia despite the fact that Thailand's Baa3/BBB- rating is one notch lower than Malaysia's Baa2/BBB.

Thailand has a 7.7% April 2007 bond trading at a bid/offer spread of 160bp/143bp, while Malaysia's benchmark 7.5% July 2011 issue is trading at 248bp/238bp. Bankers argue that while the illiquidity of the Thai bond makes current levels completely artificial, the rarity value of any new dollar deal by an issuer from the Kingdom should play well where pricing of a primary markets transaction is concerned.

Most also conclude that once the Samurai markets recover from a recent few weeks of jittery trading, the Kingdom will make the yen markets its first stop. It has said that five banks รป Daiwa SMBC, Merrill Lynch, Mizuho Securities, Nomura and Salomon Smith Barney - will be asked to submit proposals.

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