The Thai corporate bond market looks set for another busy year as the Thai central bank is committed to keeping interest rates low and issuers are keen to take advantage by extending their maturity profiles.
Source: Reuters/Damir Sagolj
Small wooden boats with local vendors and tourists manoeuvre through the Damnoen Saduak floating market, 110 km (68 miles) west of Bangkok in Rachaburi.
Thai Corporate bond issuance looks set to pick up where it left off at the end of 2012. Thai corporates sold a record US$13bn of bonds in the local market in 2012, compared with US$19bn the year before. Part of that was because many deals were delayed until last year after the worst floods in at least 50 years battered seven huge industrial estates in October 2011 and slashed GDP growth to just 0.1% in 2011.
However, record low policy rates were also a significant factor driving issuance. The Bank of Thailand has cut its policy rate by 75bp to 2.75% and it has a real sense of urgency about keeping monetary policy very loose. Likewise, the government will be running an expansionary fiscal policy.
With rates expected to remain low for most of 2013, Thai corporates are seen taking advantage of easy cash conditions to extend their maturity profiles into the coming year. However, subordinated bonds, which made up a sizeable proportion of new issues this year, will taper off with Basel III coming into effect, local bankers said.
“We expect 2013 volumes to be as high as 2012 [about US$19bn] given the low interest rate environment with close to 50% of primary supply coming from the need to refinance bonds due in the coming year,” said Pimolpa Suntichok, executive vice-president and head of capital markets at Siam Commercial Bank. “The active sectors would still be the ones which require heavy investment like energy, petrochemicals and construction in addition to property developers.”
While there are some concerns that the government issuance as part of its expansionary fiscal policy might crowd out demand for private issuance, most bankers were sanguine about the risk.
“The government has a menu of options for financing,/ including the possibility of direct loans from local banks in the initial stages followed by the issuance of long-term and retail bonds. Whatever it is, the decision will ultimately be guided by the objective of avoiding sharp increases in interest rates,” Nomura said in a research note. Besides, the domestic markets are flush with liquidity, estimated around Bt1.5trn.
In fact, the flush liquidity conditions are likely to entice more foreign issuers to sell baht bonds as and when the basis swap becomes favourable. Not only may foreign borrowers come to the Thai baht market, ample cash conditions suggest local issuers could raise debt in local currency and swap into dollars.
It is not just 2012’s strong volumes that are expected to be matched this year but also the market’s development. Last year saw the first ever corporate issuance of perpetual bonds in Thailand, from oil and gas concern PTT. That deal’s success should pave the way for more perpetual issuance now that investors are familiar with the structure.
Banks are among those likely to take advantage of the new structure. They are expected, at some point this year, to start issuing subordinated bonds in the new Basel III format, including in the perpetual format.
The move may come sooner rather than later. The Bank of Thailand has just outlined the capital requirements for local banks under the new Basel III framework. According to the guidelines, common equity Tier 1 should not be less than 4.5%. Tier 1 capital must be at least 6%. The minimum requirement for and a total capital was left at 8.5%.
“We believe subordinated debentures will still be the main source for raising capital for Thai banks. However, this depends on how much the Bank of Thailand and SEC will regulate the sales of Basel III-compliant issues to domestic investors, especially retail investors as they are the major subscribers of the bonds,” a Thailand-based banker said.
“Issuing them internationally is another option in case it is heavily regulated locally. On the other hand, equity is still likely if there is an opportunity in the market. Most banks in Thailand haven’t done another round of equity raising yet,” he said.
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