Three short listed for Thai sovereign mandate

The Kingom of Thailand''s new bond deal has bankers salivating but investors remain unenthused.

If there is one deal that has kept the traditional August boredom at bay, it is the Kingdom of Thailand's global bond, which is expected to launch in October. According to a Hong Kong based US fund manager, "lots of bankers have been salivating over this mandate." But some investors are less excited about the return of this sovereign issuer to the global bond market.

The investment banks short-listed for the mandate are thought to include Deutsche Bank, JP Morgan and Salomon Smith Barney. All three made presentations to Thailand's debt office last Thursday. "The expectation is that there will be a development this week," said a banker from one of the short-listed banks. "The longer it takes to make a decision, the more political factors will be seen to be playing a part and upsetting a rigorous review process. If the decision extends beyond a week, people will raise the question of whether politics is involved."

Thailand is expected to come to market with an $800 million to $1 billion global bond. Bankers close to the issue confirm that the sovereign is looking to do a 10-year dollar deal rather than a shorter-term issue or even one split between dollars and baht. "It's the deal of the year," said one. "It's very hotly-contested because it's a rare sovereign issue and will be a benchmark. It's a trophy deal."

There is much to suggest it is a good time for this issuer to return to the dollar bond market. "The technical factors that contribute couldn't be much better," said the banker from one of the short-listed banks. "Thailand was the genesis of the crisis back in 1997 and it hasn't been to market since then. Asian sovereigns have been upgraded and the current environment in the US means that investors there are looking for paper that is free of event risk. Asian sovereign paper is ideal and Asia is the best of the regions right now."

In addition, spreads are tight and absolute interest rates are low. There is a strong Asian bid caused by high liquidity in Asian banks and institutions. This means that there is great demand for Asian issues and the supply of Asian credits issued in US dollars is weak. This is expected to contribute to the likely success of the deal.

"It's very much a diversification play because there has been extremely limited supply from Thailand over the years," said a banker involved in the original line-up. "International investors would have liked to diversify into new bonds but there has been nothing in five years from Thailand. They are keen to get away from Malaysia and the Philippines who are large borrowers."

But while the bankers see the deal as an exciting market play, investors are looking at the economic fundamentals and not all of them are impressed.

"I'm not wild about Thailand. It's in third gear but it should be in fourth gear," said a fund manager based in Singapore. "Thailand has its structural problems that aren't going away. NPLs are in a log-jam, it hasn't made leaps and bounds in terms of restructuring and I'd give Thaksin a B or a B-minus. It's going to be part of the [HSBC ADBI] Index so I may buy some, but I doubt I'll go overweight."

Thailand is currently rated BBB- by Standard & Poor's and Baa3 by Moody's Investors Services. S&P this month upgraded Thailand's outlook from  stable' to  positive'.

The Hong Kong-based fund manager has what he calls a "laundry list" of complaints about Thailand - a country he says has "a fair way to improve". Among his concerns he lists lack of reform in the banking sector, NPL's in excess of 30%, a capital utilization rate of around 65% rather than a healthy 70%-75%, and a fairly high fiscal deficit. On the plus side he cites reasonable levels of paid down external debt, fairly easy monetary policy, low political risk and "okay" GDP growth.

If the banker involved in the presentation stage of the deal has much to do with it, such concerns won't be much of a factor. "Demand will be based on technical factors. You have a summer suit but when it gets to winter, you need a winter suit. A lot of investors need such diversification. They don't have Thai paper so they'll need to buy it."

With mixed feelings among investors about economic fundamentals, most discussions about the deal are likely to be about pricing.

Most people watching the deal closely agree that the issuer will want the deal priced inside comparable Malaysian issues, despite the fact that Malaysia's country rating is two notches above Thailand. Bankers believe this is technically possible if the deal is aimed squarely at the Asian bid.

But according the short listed banker, "the sovereign is keen to ensure that interest is skewed away from local investors." This is because local investors tend to buy and hold as opposed to international investors who would be more likely to trade, enabling it to become a liquid benchmark.

According to one banker, if the deal is aimed at local demand, the yield could probably come in at somewhere around 10bp-15bp tighter than comparable Malaysian issues, but at that level international investors could be deterred.

"It would be a shame if they get [the yield] as tight as they want, because it's not reflective of fair value," said the Hong Kong based US fund manager who expects the bond to be priced 10bp-20bp tighter than Malaysian issues. "They'll probably get away with it because a lot of banks are hungry for Asian paper. Maybe some fund managers are glossing over the negatives in Thailand because it has been illiquid. It is always interesting to see a new name come to market but based on price thoughts, it is going to be priced too rich for us to get excited," he said.

According to the banker involved in the original line-up of investment banks: "Demand is strong in the Asian region but outside Asia, relative value will be very critical. If they want to attract investors in Europe and America they have to pay a premium  perhaps around 20bp. They will probably try and achieve the best of both worlds  have a tightly priced deal and use a hugely oversubscribed Asian book to persuade outside investors to come in and take the upside."

The scarcity value may also be reduced by the size of the deal. "I hear they're trying to price it tightly, but $1 billion at a tight spread, is that possible?" said the Singapore based fund manager. "At current [spread] levels, it's going to be tough and it depends how much wider to Malaysia they are prepared to go."

The Kingdom of Thailand last issued five years ago with a $600 million issue due in April 2007. It was recently trading at a spread of 110bp over five-year US Treasuries to yield 4.42% - tighter than the Federation of Malaysia 2009, which was trading at around 170bp over Treasuries. The Kingdom of Thailand 2007 secondary level is not a good benchmark, however, because it is held as reserves by a number of banks and is therefore highly illiquid.