PARTICIPANTS
Sanjay Ahuja, senior vice president, finance, Indorama Ventures
Tom Byrne, head of sovereign risk group, Asia Pacific, Moody’s Investors Service
Arttavit Chalermsaphayakorn, CFO and executive director, WHA Corporation
Sutee Losoponkul, head of Treasury Group, CIMB Thai Bank
Thomas Meow, head of credit markets and banking, CIMB
Yingyong Nilasena, chief investment officer, Government Pension Fund
Kiyoshi Nishimura, chief executive, Credit Guarantee Investment Facility
Tada Phutthitada, president, the Thai Bond Market Association
Win Phromphat, head of investment, Social Security Office
Suwit Rojanavanich, bond market advisor, PDMO
Denise Thean, deputy chief executive, RAM Rating Services
Moderator: Matthew Thomas, contributing editor, Asiamoney
Asiamoney (AM): The Bank of Thailand held the policy rate at 2% in early August. But what should investors expect for the rest of the year — and even, next year, if you can look that far ahead — when it comes to rates?
Sutee Losoponkul, CIMB Thai Bank: I should stress that this is a trading view — this is not from the central bank — but we think this year that interest rates will be stable at 2%. However, in the last quarter of this year you need to watch the market. Even though the policy rate may not change, the yield on long-dated government bonds may start to become more volatile. The markets are already expecting US interest rates to move up next year, and that will start to get priced in more. Foreign investors still hold Thai baht bonds, so that will have some impact.
There will not, however, be a major impact on the Thai baht market from the tapering of the US Federal Reserve. On the worst month, in May, foreign investors held about THB650 billion of government bonds. But in the last couple of months there has been an inflow into the country. The net outstanding foreign holdings of government bonds was about THB770 billion in July.
It is possible we will see the Bank of Thailand raise interest rates in the second quarter or the second half of next year. Right now, in terms of growth, most economists project that Thailand will be able to grow somewhere between 4% and 5%. Growth will not be an issue for the Bank of Thailand. They will have to watch for the risk of an asset bubble from these low interest rates, rather than worrying about fuelling growth.
AM: What is the Public Debt Management Office planning for the following year, particularly when it comes to helping the country meet its infrastructure funding needs?
Suwit Rojanavanich, PDMO: The infrastructure spending plan for logistics and transportation will be presented next week, but I can tell you we will start with term loans first, but we will later move into fixed rate bonds. There will be roads, rail, ports and airports: land, sea and air. These infrastructure projects are all necessary to make Thailand ready to compete in the future.
We will largely be mobilising our normal strategy to help fund these projects: that is, using a mix of bond maturities from five and 10 years, to 30 years and 50 years. But we are also planning to do more bond switching later this year to create more benchmark bonds in the five year part of the curve. We also plan to sell amortising bonds, as well as more inflation-linked bonds.
At the moment, it makes more sense to tap the domestic bond market rather than the foreign bond market because of the political situation. This is tentative, but at this point, we do not have any firm plans to tap the dollar bond market.
AM: The corporate bond market had a strong start to the year, despite obvious sources of political uncertainty. What should market participants expect in terms of issuance volumes in the months ahead?
Thomas Meow, CIMB: It might help to give a little bit of background first. In 2013, close to THB700 billion of domestic bonds were issued. Out of that, around 60% came from the private sector, about 35% came from state-owned enterprises, and the rest came from foreign issuers. But this year, private sector issuers are on track to issue a lot more. They sold around THB300 billion in the first half of this year, with much of the supply coming from the energy, property and banking sectors. There is a diverse base of issuers coming to the market, and the private sector is picking up the slack from SOEs, which have slowed down their issuance due to the political uncertainty in the early part of the year.
The government is already planning a lot of infrastructure projects. We are very hopeful that going into 2015 both the private sector and the public sector will continue to supply bonds in the domestic bond market. In the ASEAN markets, demand is always more than supply because our savings rates are very high. It is good news that supply is coming and is due to increase in 2015.
Tada Phutthitada, Thai Bond Market Association (Thai BMA): I would like to break down the outlook into two parts, the SOE part and the private sector part. Until 2011, the supply from SOEs in the domestic bond market was around THB60 billion per year, but it has since jumped to around THB210 billion per year during 2012 and 2013. The reason was funding for the rice subsidy scheme, and from this year, that figure should be reduced. SOE supply should be much less, because there is no new funding needed for the rice pledging scheme.
In terms of corporate bonds, 10 years ago the outstanding amount was around THB400 billion, but it reached THB1.7 trillion this year. The total amount of issuance was around THB450 billion last year, and in just the first half of this year, the amount of issuance was THB300 billion. This is going to be a good year for corporate bonds. The record was set two years ago — when THB510 billion of corporate bonds were sold — and I think we are going to break that this year.
Many of the non-listed companies do not issue bonds yet, so in terms of supply we have a lot of room to grow. These companies are an obvious source of supply in the future.
AM: There is a perennial debate among Asian funding officials about the right level of foreign bond ownership, with frequent references being made to the destabilising role of foreign capital outflows during the Asian financial crisis. How important are foreign investors to the government and to corporations? How wary should funding officials be of foreign bond ownership?
Rojanavanich, PDMO: Foreign investors sold some of their bond holdings last year in the run up to the coup. They kept selling for a while after that, which we understand because they have certain rules and regulations about political uncertainty. But eight weeks after the coup, foreign investors started to buy their bonds back. We are satisfied with their overall holding at this point. Foreign investors hold about 17% of outstanding government bonds at the moment. They still have confidence in our bond market.
Tom Byrne, Moody's: I don't want to harp about the Asian financial crisis, but that was really the beginning of the bond market here in Asia. It was after the impact of the crisis that the bond market really took off. Before that, the flow of credit was overly dependent on banks — so when the banking system is in trouble, the flow of credit for the whole region seizes up. It is good from a systemic point of view to have a greater number of people making credit decisions, particularly when banks are heavily regulated by the government and there can be political reasons for at least some bank lending. The growth of the bond market was the silver lining of the Asian financial crisis.
Going back more directly to your question, we rate about 45 high yield issuers in south and southeast Asia — and out of the roughly US$82 billion of debt these issuers have sold, 64% is in foreign currency. That may sound alarming, but there is no a priori limit to how much foreign currency debt should be issued. The question is, rather, how well it can be managed. We find that in our universe of issuers this debt is well-managed, mainly because there is a natural hedge. There is nothing wrong with foreign currency debt. In fact, it is a benefit for a corporation if it can fund itself the best way possible, regardless of the currency.
We find that liquidity among high yield issuers that we rate tends to be good, and tenors tend to be fairly long. They seem to be managing their exposure to foreign currency debt pretty well.
Denise Thean, RAM: Foreign holdings of Thailand's government bonds are really very modest compared to Malaysia and Indonesia. Comparing between the end of December 2013 and June 2014, amidst heightened political risk and QE tapering, the percentage of holdings by foreign investors [in Thailand] only declined from 18% to 16%. We have seen some of these investors return in recent weeks, which goes some way to explaining the strengthening of the Thai baht. If you look at these numbers compared to the 30-40% foreign holdings in Malaysia and Indonesia, it is clear that the vulnerability of the Thai market to foreign outflows is significantly less.
AM: Retail investors are by far the biggest source of corporate bond demand in Thailand. How do bankers, issuers and regulators work together to bring more banks and institutional investors into the corporate bond market?
Meow, CIMB: More than half of the corporate bonds in Thailand are bought by retail investors. The growth on the demand side will definitely come from institutional investors. Banks hold very little in the way of bonds here when you compare Thailand to other markets. For example, in Malaysia, corporate bonds make up around 10% of banks' loan portfolio. In Thailand, it is probably less than 1%. Or to look at it another way, banks in Malaysia make up about 25% of the demand in the corporate bond market. In Thailand, they make up less than 5% of demand.
Insurance companies are also a major source of growth, as are pension funds. They hold less than 10% of outstanding bonds in the corporate bond market, whereas in Malaysia it is well above 20%. In relative terms, there is clearly a lot of development we can have in the institutional market.
It is difficult for banks to hold bonds in Thailand. Most of the bonds are single-A rated and below, whereas banks clearly want to raise high-grade bonds from a capital point of view. Banks also prefer to concentrate on loans because of relationship reasons. But the low liquidity of the corporate bond market here is a factor that cannot be overlooked. It is expensive to hold these illiquid bonds on your books, and hedging is not very efficient either, so for many banks, it is not an area they really concentrate on.
Win Phromphat, Social Security Office: Five years ago, when we had an asset size of around THB500 billion, we held around 10% of our assets in corporate bonds, so around THB50 billion. But today, after our assets have doubled to THB1 trillion, we are still holding around THB50 billion of corporate bonds.
We still have good demand for good quality corporate bonds, and we believe that the size of our AUM will double in the next five years, so we should certainly have more demand for corporate bonds in future. We also expect other institutional funds to grow over the next five years, and all of them will grow their bond demand too. But I would like to try to explain why our corporate bond holdings have not kept up with the growth of our fund on a percentage basis.
There are problems on the supply side. Many of the biggest companies do not issue bonds, and those that do sometimes issue bonds only for retail investors. We simply cannot access these bonds. Corporates with good names have choices — they can go to banks, they can go overseas — so they do not often sell enough in the domestic market. Among small- and mid-cap companies, they face a different problem. They might not get the ratings we want, and they might only come out with deals that are not big enough to attract institutional investors.
We have a very quiet secondary market for corporate bonds, and that is another thing that puts off institutional investors from participating in the market.
Yingyong Nilasena, Government Pension Fund: I agree with Khun Win. There is not enough supply of bonds from well-known corporates, and not enough bonds with big sizes either. This is a common problem in Asia, not just Thailand. The fact that some Thai companies only issue bonds to retail investors is probably a good thing for them, because it helps them diversify funding sources. But this makes the bonds inaccessible for institutional investors.
Kiyoshi Nishimura, CGIF: Institutional investors in Thailand are actually not too conservative in the corporate bond market. That is one of the problems we see in other ASEAN markets, but not in this market. There is no clear ratings cliff in Thailand. In Malaysia, it is very difficult for companies rated below AA- to issue a bond, but here they certainly have the chance to sell bonds. The problem is not on the investor side; it is on the supply side. We need to encourage more companies to issue bonds.
But the supply issue is very tough to tackle, because as many panellists have already noted, for many companies there is not a compelling reason to come to the bond market. They are already well-financed by banks. It really depends on the liquidity of the banking system and how much banks are willing to lend to corporates, and here is where I think we will see the seeds of future growth in the bond market.
Thailand's banks are becoming more constrained, not just because of the change in capital rules but also because of unique changes in Thailand, such as the deposit insurance law. Because of this, there should be more interest from Thai corporations to come to the bond market. I'm not pessimistic about the future of corporate bond issuance in Thailand.
AM: Do local market participants feel there is a need to increase the maturities available in the local market? How much opportunity is there to sell — or, indeed, to buy — longer-dated deals?
Arttavit Chalermsaphayakorn, WHA Corporation: We have just managed to issue a multi-tranche bond, ranging from three years to 10 years. We received a warm reception from a range of investors, including mutual funds, provident funds, banks and cooperatives. But we're still one of the few property developers to tap the 10 year part of the curve. Investors believed in the long-term viability of our business, and we wanted to match our assets and our liabilities by adding a long-term tranche.
There were somewhat different investors in the different tranches. Mutual funds and provident funds were active in the three year tranche, and also provided some demand for the five year tranche, although that tranche was mainly driven by banks and cooperatives. The seven year tranche was mostly sold to life insurance companies, and the 10 year tranche was sold to some cooperatives and some state-owned enterprises. We managed to appeal to buyers across the investor universe.
Phutthitada, Thai BMA: PTT and PTTEP have already issued century bonds, and Charoen Pokphand Foods has already issued a 30 year bond. There are some long maturity deals in the market already. But one of the things you hear a lot from asset managers in Thailand is a complaint about the limited supply of long maturity deals. The demand is certainly there. The main issue comes from the supply side.
Because the size of our corporations compared to the banks is still small, they can largely depend on bank borrowing. But in the future, the corporate bond market is going to evolve to encourage the private sector to tap the bond market more and more. They will tap the short-term first, but then they will increase the duration.
Rojanavanich, PDMO: Some companies prefer to tap the market by short maturities, such as three to five years, often in order to make repayments. But the government is more interested in managing its debt profile by lengthening out maturities. We were asked by insurance companies to offer them long-term bonds to allow them to push out their asset maturities, so we have issued 50 year bonds and 30 year bonds.
The SOEs tend to stick to the long-end of the curve, and in some cases, we have very little influence on their decisions. Some of the SOEs are quite rich, like the Airport Authority of Thailand, but others cannot really borrow by themselves. We need to take care of them in order to keep them afloat. We have to educate them how to manage debt, and recommend the terms and conditions of their bonds. We certainly prefer the longer maturities.
Sanjay Ahuja, Indorama Ventures: We are still in a transition mode. We are growing, and we do want to increase our debt maturities. At the moment, the average maturity of our bonds is a little less than eight years. The longest duration has been 12 years. We are working with certain relationship banks, and we are considering coming to the market with a perp pretty soon. Thai baht perps have not been popular so far, because of certain regulatory issues and certain issues of understanding among investors. But that is something that we are looking at for the future.
AM: That's interesting. The perp is one product at least that does sit well with the retail investor base, so from what we were talking about earlier — the dominance of retail investors in this market — there does seem a good chance for perps to take off in Thailand.
Meow, CIMB: The most developed perp market in ASEAN countries is Singapore, because Singapore has a big base of private banks, and these investors have been instrumental in supporting perp instruments. In Thailand, because there is a big retail market, it is only natural for investors to learn a little bit more about how they can enhance their yield with perpetual bonds. Retail investors are very familiar with the equity market, and this is something sitting in between giving you a better return.
I'm positive that it is just a matter of time before a perp market develops in Thailand. The size of individual deals starting out is likely to be quite small, but they will get bigger in time.
AM: It would be good to hear from the investors on the panel about the maturities in the local market. Is this a situation where both sides are looking for maturities to move out a little bit?
Nilasena, Government Pension Fund: With our big portfolio size relative to the market, there seems to be insufficient supply of long duration deals. If we are looking to make a big investment in long duration deals, we really need to plan far in advance and have to rely to a large degree on the primary market. It may take us somewhere between six and nine months to hit our targets if we are going to make a big adjustment to our portfolio structure.
Phromphat, Social Security Office: Our guideline states that at least 60% of our investments need to be highly secure assets, including government bonds and corporate bonds with investment grade. We now have more than 80% of our assets in these asset classes, including around 5% in the corporate bond market. We invest in infrastructure financing indirectly, through the government bonds issued by the PDMO. But in the future, we will welcome more and more bond issues to help finance infrastructure projects. It is good for the country, and good for the people to provide more infrastructure financing.
AM: You said that around 60% of your portfolio should be high grade, but at this point as much as 85% is. How do bankers and issuers convince you to move down the credit curve?
Phromphat, Social Security Office: Well, that is part of the plan. Our plan for the next five years is to increase the proportion of risky assets from 15-20% at the moment to 30-35%. We also plan to invest more in corporate bonds, both in Thailand and overseas. We have difficulties in going down below A-, and for each issuer we will, of course, have exposure limits. But we want to relax the second part of this equation at the moment. We are looking to get higher exposure limits for individual issuers.
AM: One of the changes that has been suggested for Thailand's corporate bond market has been the introduction of medium term note programmes. How much of an impact would that have on issuance?
Meow, CIMB: It saves costs to create an MTN programme where you can tap the market as and when you have the need. It is probably the most efficient way of raising money. The benefits are certainly there. Take project finance: you can set up an MTN programme to issue bonds for a project. That is very helpful, because it enables sponsors to avoid negative carry. They do not have to issue everything on day one.
In Thailand, compared to other ASEAN markets, it is very efficient to borrow in the loan market in terms of documentation, so how does the bond market compete with that? The MTN market is one way to swing things in favour of bond issuance, especially considering it allows corporations to take advantage of the attractive funding rates or reverse enquiry from investors.
Ahuja, Indorama Ventures: There are a lot of benefits of introducing MTNs, including cutting down on the lending procedures and cutting down on the documentation costs. Specific to IVL's case, we have not faced a situation where we have had problems in raising the money timely. We are nowhere near our single borrower limits with our relationship banks and they are able to match our urgent requirements in case of acquisitions. The corporate acquisitions in our industry also come with a timeline which fit in with a fresh issuance of bonds. That said, MTNs would definitely be a popular tool when introduced.
Chalermsaphayakorn, WHA Corporation: As an issuer, we are trying to reap the benefits of the historically low interest rates we see today, so we are trying to penetrate the bond market at the same time as keeping a good relationship with our banks. But by nature of the bond repayment profile which is on schedule, we have to plan ahead. As we are trying to de-lever our balance sheet upon the completion of asset monetization to the property fund or REIT, we may need to balance the funding sources from the bank loan so it can be retired upon asset spin-off. Hence, simply turning to the bond market is not always the best option.
In addition, there are advantages and disadvantages. Bonds can give us more flexibility over funding, but they do not always give us money right now. This is why the discussion about introducing MTNs in the local market is interesting. We certainly want to reduce the lead time of our issuance.
AM: How much is secondary liquidity an issue in Thailand's domestic bond market? What needs to be done for secondary liquidity to improve?
Losoponkul, CIMB: It is a major problem. We need to work together to overcome it. We tried to set up secondary trading for bonds, but we found it difficult to get the bonds ourselves in the first place. The demand in this market is much greater than supply, and because half of the corporate bonds are held by retail investors, there is very little turnover.
We need to make improvements on the settlement side, and we need to have a central clearing counterparty and encourage scriptless for retail investors. Right now, they go to the bank when they want to sell, and it can take five days to settle. A lot of these investors will not be in Bangkok, they will be in provinces, so it will take them even longer to do the settlement. This is one of the reasons they refuse to tell.
Retail investors are also put off by the capital gains tax they pay when they want to sell. Many retail investors do not understand exactly how much tax they will need to pay, so they just hold onto bonds to avoid the uncertainty.
The other problem is that so many investors in this market will simply not buy a bond above par. They will buy a bond at par, or below par, but they do not think they can make money by buying bonds above par. We need to educate them, and encourage them to come into the secondary market more.
Phutthitada, Thai BMA: Our dream is to provide the whole spectrum of credit risk to the market, in terms of issuers but also in terms of products. We would like to raise awareness of corporate bonds among investors. We want them to understand the risks of the investment, which would allow them to match their returns better to the real risks they are exposed to.
We need to improve secondary liquidity in the local market. We keep talking to the revenue department about easing the capital gains tax, and many other topics that I should not go into in much detail here.
ThaiBMA has proposed a strategic plan to the board on the development of the corporate bond market. One of our key strategies is called 'outside in'. Currently, our regulations prohibit Thai issuers placing foreign currency bonds in offshore markets to sell such bonds in Thailand, but many local investors are buying these bonds in the offshore market anyway. We want to explore ways to allow foreign currency deals to be listed in the local market.
Nishimura, CGIF: Secondary market liquidity is not only an issue for developing markets like Thailand, but also developed markets like the US, where there is trend of declining secondary market liquidity in the corporate bond market. The key is bringing in many different types of investors, all with different strategies, and all impacted in different ways by changes in the environment. Foreign investors tend to have very different strategies to local investors, so that is one obvious place to start.
The problem is that it is very difficult for foreign investors to invest in Thailand's corporate bond market, mainly because of credit rating issues. They tend to require higher credit ratings. We did a Thai baht transaction last year, providing a guarantee to a bond issued by Noble Group. About a quarter of this issue was taken by foreign investors, because they were quite comfortable with the CGIF wrap. We also just did a deal in Indonesia, wrapping a deal for a frequent issuer in the local market that had no problem issuing domestically — but wanted to attract more offshore investors. That deal was 100% taken by offshore investors. These are some of the ways we can help bring foreign investors into ASEAN bond markets.
AM: ASEAN integration is clearly a positive for the region as a whole, but some company executives across the region feel that it will be to their detriment. There are some fears among individual companies about how well they will be able to compete. How much of a positive will ASEAN integration be, not just for the region as a whole — but more specifically for Thailand?
Byrne, Moody's: Thailand is a key member of the ASEAN community. It is already part of the global supply chain, particularly in auto-mobiles and electronics. Thailand benefits from any expansion of trade, whether it occurs intra-regionally or globally. Countries gain from trade. That is a key tenet of economics. If the ASEAN region continues to expand its internal market, reduce barriers and harmonise regulations, the competitive companies will prosper and those they are not as competitive will struggle. That's the nature of the game.
We saw with the European Union that the common market led to a real boom in trade and economic development, particularly in the peripheral regions. These countries were much better off, with much higher growth, so the reduction of trade barriers between all of these ASEAN economies is clearly going to be a net positive for countries across the region.
Thean, RAM: Over the past few years, intra-ASEAN trade has grown a lot. But if you look specifically at the bond market, we really see very little cross-border investment. But that is starting to change, albeit slowly. Almost all of the major institutional investors we have spoken to in Malaysia already have some exposure in the ASEAN local currency bond market. A lot of them start with the government bond segment first, and from there invest in human resources and set up the infrastructure to start investing in the corporate bond markets.
There has been a lot of talk about the comparability of ratings by domestic rating agencies across the region. That is why we started offering the ASEAN scale, which we think will be for the benefit of investors across the region. Over the past few years — following the global financial crisis — we have seen the Malaysian bond market become more internationalised. This has made the market a lot more interesting and diverse, and we hope other markets will benefit from that moving forward.
Byrne, Moody's: At Moody's, we feel that rating agencies increasingly do have a role in the development of capital markets, particularly global rating agencies because we provide a globally consistent set of ratings that investors — no matter where they are — can understand when looking at overseas markets. Improving the flow of information in credit markets can help improve secondary market liquidity, which is a big problem in the emerging markets.
AM: Why has increasing ASEAN trade not translated into greater cross-border flows in the region's bond markets?
Nishimura, CGIF: Most of the interest in our guarantee programme comes from ASEAN companies looking to move across the borders and tap other markets in the region. Sometimes, they need funding in a particular currency to expand in that country, but in most cases, they feel that because their business has become more regional, they want to diversify their funding sources across the region.
This trend will continue, but there are many constraints. One of the key problems already touched upon by Denise and Tom is the rating requirement. Corporations looking to fund in markets across the region need to get a number of different domestic ratings, and they may not always get the rating they want or expect. By making them repeat the process many times over, you're increasing the risk that they will be put off and will decide to stick to funding at home.
Meow, CIMB: We need to look at promoting more ASEAN issuers to sell bonds in other ASEAN countries. The tone from the top must be clear. There must be some faith and trust among ASEAN countries that an issuer in another country should be allowed a fast-track to offer its local currency bonds to qualified investors in other countries in the region. There needs to be some mutual recognition of rules and credit ratings. This cannot happen overnight, but it can happen one-by-one, perhaps starting with the more developed markets.