Foreign funds flowed out of Thailand when the army took control on May 22, but even the uncertainty over the military government’s plans for state-owned enterprises failed to get in the way of the country’s first public offering of Basel III-compliant bank capital.
Barely a month after the coup, government-owned Krung Thai Bank sold a US$700m 10.5-year non-call 5.5 Tier 2 bond to a resounding reception. The issue introduced investors to Thailand’s version of the Basel III loss-absorption rules that force bondholders to share the pain if the bank fails, setting a benchmark for others to follow.
In KTB’s case, bondholders are required to write down the notes if the local regulators decide the bank is no longer viable. However, KTB also introduced an investor-friendly feature in the write-down process, allowing for a partial write-down on a sequential basis as Additional Tier 1 holders have to absorb losses before it flows down to T2 holders.
In order for any write-down to happen, there must first be a government injection of funds into the bank. Investors had mixed reactions to this as critics said it meant any government injection could be considered a non-viability trigger, while proponents said it was investor friendly as the government would have to show its commitment to the bank before investors were hit.
In the end, the response proved the critics wrong. The issue attracted a high-quality book of US$4bn, allowing KTB to squeeze guidance from a yield of 5.5% to price at 5.2% and increase the size from US$500m to US$700m. The bonds outperformed in secondary trading the next day, tightening 13bp in the morning to a spread of 340bp from the reoffer spread of 353bp.
The deal was not without its challenges. KTB had been exploring a US dollar T2 issue since February, but took a hit from months of political tension that froze all government activities.
Once it became clear the coup would release that gridlock and, with markets holding steady despite the intervention, KTB moved quickly with a three-day roadshow in Asia and London to update investors on the political situation and market its deal.
The roadshow coincided with the US Federal Reserve’s signals for a continuing accommodative stance. US Treasuries rallied and joint leads Goldman Sachs and HSBC were quick to take advantage of the positive sentiment to launch the deal.
Ultimately, the bank overcame concerns over the political climate and shaky US dollar primary markets to sell an issue that was priced competitively against its implied secondary market curve and market comparables. It was also a landmark deal for the country’s financial sector, with the first domestic Basel III offering following two weeks later.
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