Thailand Asean Bond Markets Roundtable: Issuer Panel
Thailand has a lot to offer foreign issuers hoping to find funding opportunities in the offshore markets, but tougher regulations for foreign names and an illiquid swap market can put some issuers off. Perhaps not for long. Asiamoney talks to a group of leading market participants about the opportunities for foreign and domestic issuers in the Thai baht bond market.
Chung Chee Leong, president and chief executive, Cagamas
Christian de Guzman, senior analyst, sovereign risk group, Moody’s Investors Service
Boo Hock Khoo, vice-president, operations, Credit Guarantee
Suneel S Jhavar, vice president, corporate finance, Indorama Ventures
Nor Masliza Sulaiman, global head, capital markets, CIMB
Nisa Laohasomboon, assistant chief financial officer, Bangkok Dusit Medical Services (BDMS)
Somkiat Suttiwanich, chief financial officer, Nam Theun 2 Power
Company Limited (NTPC)
Dr. Win Udomrachatawanich, chief executive officer, One Asset
Moderator: Matthew Thomas, contributing editor, Asiamoney
The participants (left to right): Boo Hock Khoo, vice-president, operations, Credit Guarantee Investment Facility; Christian de Guzman, senior analyst, sovereign risk group, Moody’s Investors Service; Dr. Win Udomrachatawanich, chief executive officer, One Asset Management ; Nor Masliza Sulaiman, global head, capital markets, CIMB; Matthew Thomas, Asiamoney; Somkiat Suttiwanich, chief financial officer, Nam Theun 2 Power Company Limited (NTPC); Chung Chee Leong, president and chief executive, Cagamas; Nisa Laohasomboon, assistant chief financial officer, Bangkok Dusit Medical Services (BDMS); Suneel S Jhavar, vice president, corporate finance, Indorama Ventures
Asiamoney (AM): What is the credit outlook for Thailand at the moment, as well as the bigger issuers in this country? What are the major factors that investors should be on the look-out for when it comes to assessing the credit quality of corporations in this country?
Christian de Guzman, Moody’s: It may help if I gave a regional perspective before taking a look at the specific issues affecting Thailand. The ASEAN region is facing a challenging outlook. There are several factors that we need to be on the look-out for. The uncertainty we see in China is clearly a major factor, but softer commodity prices is another thing that can affect this region greatly as a number of ASEAN countries are big commodity exporters. Thailand is, of course, no exception, where there is a large agricultural sector. The capital market volatility ahead of the imminent interest hike by the Federal Reserve is another factor causing a lot of uncertainty. There are growing questions about whether the Fed should raise rates next week [note: this roundtable was hosted on September 10].
Put all this together and it is no surprise that you are seeing these systemic shocks starting to affect economies and markets across the region. In some cases, this is exacerbated by domestic sources of risk. In Thailand and Malaysia, and even to a certain extent in Indonesia, there are political risks that are compounding the uncertainty about these global factors.
Credit conditions have started to turn as compared to what investors had gotten used to over the last few years. From a credit ratings angle, the choices that countries make in tackling these problems are not just going to impact their rating outlooks; they are also likely to have a real impact on the ratings themselves.
Thailand is an interesting case because the political risks have started to interface with the economy to a larger degree than what we have seen over the past few decades. This is visible in the lacklustre growth we have seen over the past couple of years. In previous decades, when there have been instances of political volatility, the economy just kept on ticking. But arguably over the last few years, there have been signs that political risk has had an effect on business sentiment. While we have not seen investment leave the country to a large degree, Thailand is attracting FDI at neither the pace it has recorded in the past, nor at the pace suggested by its advantages in infrastructure or quality and supply of labor.
Thailand is performing under potential. We put out a revised forecast for Asia Pacific in general this week where we’re projecting GDP growth for the region as being 1%-point lower than our previous forecasts both this year and next, and Thailand is no exception to this. The country can still return to potential growth over the medium-term, but it is in stasis at the moment. Thailand's performance is going to depend on political developments.
Keynote: Bringing Thai companies home
The following is a series of highlights from a keynote speech made by Tipsuda Thavaramara, deputy secretary-general, SEC Thailand.
• We are striving forward with a goal for the Thai capital market to become a financing and investment destination, serving the needs of governments, corporates and investors within ASEAN and beyond. So today, please allow me to highlight some of these key initiatives and relevant progress so far.
• Under the baht bond scheme, issuance of baht bonds by CLMV countries was made possible with the PDMO's relaxation of credit rating requirements to allow government and unrated entities with government guarantees to be eligible baht bond issuers.
… to better serve the financing and investment needs within ASEAN and particularly CLMV, the SEC Thailand will continue to work closely with the PDMO in determining how we can further reduce any existing obstacles, such as the limited number of rounds per year that eligible issuers can submit baht bond applications.
In addition, we hope that a similar credit rating requirement amendment as for CLMV entities would be extended to include issuers from other ASEAN countries as well.
• Since 2012, the SEC Thailand has allowed unrated bonds to be offered directly to institutional and high net worth investors … As for retail investors, they too can have a certain level of indirect exposure to unrated bonds through retail mutual funds.
Therefore, not only are there more opportunities for both domestic and international investors to choose products in Thailand that are more suitable for their risk appetite, our market can also better serve issuers' financing needs, either local or abroad. This will certainly bring us one step closer to our goal.
• Singapore, Malaysia and Thailand have established the Streamlined Review Framework for the ASEAN Common Prospectus. The three regulators agree to coordinate the review process and will rely on home regulators' views to the extent possible.
• Thailand has been very active under AMBIF, as well. In fact, I am glad to share with you that the first pilot issue under AMBIF will take place here in Thailand, with a Japanese bank planning to issue baht bonds by the end of this year...
• Of course, we will still have a long way to go and there will be more obstacles to overcome. But I am certain that if relevant authorities and market players are willing to work together towards this common vision, the intended outcome is definitely within our reach.
AM: Does the political risk make Thailand more vulnerable to global economic shocks than some of its ASEAN peers?
De Guzman, Moody’s: I don't think so. The importance of political risk can be quite high for emerging markets, and we have certainly seen a heightened risk in Malaysia. But foreign investors’ exposure to Thailand is relatively low. That means that capital flow volatility is less of a risk here and, as a result, political risk has had a reasonably muted short-term impact on domestic markets.
AM: What should investors expect in terms of volumes and yields in the bond markets in the coming months?
Nor Masliza Sulaiman, CIMB: Although a decrease is seen in the total Thai baht corporate bond issuances, the issuance volume to date from corporate issuers remained resilient at Bt310bn. The lower overall issuance was mainly due to reduced borrowing by state-owned enterprises. We expect over Bt500bn of issuance from corporates by year end, relatively similar to last year's volume, and an overall issuance of Bt600bn. We expect the pipeline will increase next year to Bt700bn.
The Bank of Thailand has cut rates from 2% to 1.5% this year, and we do see a very steep curve at the moment. To give you an example: three year rates have fallen by around 40bp since the start of the year; at the same, 10 year rates have widened by more than 40bp. Short-term rates have mimicked the policy cuts, but long-term widening of rates could imply the direction where rates are actually heading. There is a strong expectation from the issuer community that rates will increase in general hence the frontloading of issuances seen in various regional and global markets.
Corporate bond spreads are tightening, which augurs very well for the issuer community. Because of that, investors have ventured out to slighter longer tenors for a yield pick-up. We were hoping to see investors accept longer maturities, so that is good news.
Thailand's bond market is very robust in terms of high yield as well as the single-A market, which represents more than 50% of the total yearly issuance. Corporate issuers in this market are very lucky, because you do not see the same credit appetite in other countries in this region. In Malaysia, the single-A market is limited and BBB-rated market is non-existent.
There is a strong demand from retail investors in this market, which is another factor that really makes this market stand out from other ASEAN bond markets. Retail investors represent about 45% of the bond investor base in this country.
AM: How attractive is the bond market for NTPC at the moment, especially when compared to the funding you can get from bank loans?
Somkiat Suttiwanich, NTPC: The size of bond market funding for us last year was around $200m, but the largest portion of our financing remains with the bank loan market. We consider using a combination of bank loans and Thai baht bonds to meet our funding targets. However that approach can be challenging, especially since you have to juggle different covenant agreements with lenders and bond investors.
The Thai baht bond market is becoming more and more developed. The tenors in this market used to be relatively short, but they are now long enough for our financing needs. They are also competitive in terms of pricing. We benchmark our funding to bank loans, but bond markets can usually beat our bank loans. The other major benefit to the bond market, of course, is that we can get long-term fixed-rate financing, rather than relying on the floating-rate loans.
There are some things we would change, however. Foreign issuers and local issuers are treated completely differently in this market, and as a Laos-based company, that is a problem for us. There is a rule that foreign issuers need to issue within certain months after obtaining approval. That can be difficult if the market environment is not conducive to a particular deal.
There are also some restrictions on the structure for foreign issuers. We want to amortise our bonds to match the loan repayment profile. But we are not allowed to do that for the first three years of a bond. If I could make one change in this market, it would be that companies from Laos like us or other companies within the region be treated no differently from Thai issuers. I recognize there may be a need to carry out an initial screening of non-Thai issuers but, once this process is over, there should be no other restrictions.
AM: How does Thailand's domestic bond market compare to other markets within the region?
Boo Hock Khoo, CGIF: We are tasked to look at the development of the ASEAN bond markets. There are six markets that exist in this region, including the Vietnamese dong market, which is very small. Credit needs to be given to Thai market authorities, because the Thai market is very efficient when compared to a lot of its peers. Malaysia, as a comparison, has a very large market, but it doesn't have the breadth in terms of credit ratings, where most bonds are AA and above. Thailand is in many ways an ideal market for the region's regulators and stakeholders to look to.
What we would like, and what we envision happening one day, is for all of the markets in the region to have the breadth that is available in Thailand. The only thing that is really missing from the market here is project bonds. That is a very significant part of the Malaysian ringgit market, so there is still room for Thailand to learn from its neighbours, too. It would be a major step for PPP and other private sector projects to be able to turn to the bond market for funding.
Suneel S Jhavar, Indorama Ventures: Indorama has raised more than Bt40bn in the baht market. We have used that money for refinancing old debt, but also for financing overseas acquisitions. But now the dollar-baht swap rate has tightened dramatically; it is much less attractive for us to raise baht now if we are planning to use the proceeds of that funding overseas. It is better us for to fund offshore at the moment, so that is now our focus. The next market for us is likely to be Singapore dollars, and we will swap that into US dollars.
In the current interest rate environment, it makes sense for companies like us to turn to the bond market than rely on bank lenders. It might cost you a little bit more in the short-term, but the fixed rate nature of bonds means you can lock in current funding rates for a long time. That is why we are concentrating much more on the bond market at the moment.
Nisa Laohasomboon, BDMS: Within BDMS group, we have 44 hospitals, 29 of which have come from acquisitions. We also operate healthcare related businesses, for example in pathology and pharmaceutical. The use of funds for our group is thus for several purposes, such as financing for green field hospitals or healthcare-related business, acquisition financing and general corporate purposes.
We raise funds via both bonds and the bank loans. We normally fund on a corporate level, rather than funding projects on an individual level. This is the best way for us to reduce and optimise our cost of funds for each hospital or project, compared to the project finance market which is less economic, particularly for our greenfield hospitals or projects.
When we acquire any business, we find it is usually simple and fast to issue the bond but that does depend on the market window as it is not always good timing for bond issuance. We sometimes do bridged finance by borrowing the money from banks then issuing bonds later at a proper timeframe. That can help diversify our investor base. The cash flow of the company is not a problem, because we have hospitals at several stages of development which can generate sufficient cash flow for the entire group. The bond market just makes a lot of sense for us in pricing terms, maturity terms and flexibility terms.
It is important for us to concentrate our funding in Thai baht. We do get more than 30% of our revenues from overseas patients, but because we quote in Thai baht in most cases, it makes sense for us to raise funds in Thai baht to match our revenue stream, hence managing our currency risk.
Corporations need to make sure their funding plan is not just designed to help them finance their operations in a vacuum, but also to maintain a strong credit profile. This is why we also mix convertible bonds into our funding profile; they help lower our cost of funds while boost our equity level and keep our ratings strong.
AM: How attractive is this market to foreign issuers right now, considering the volatility that we are seeing globally and locally? It would be interesting to see how Cagamas, which already has experience of turning to the offshore markets, views the potential for Thai baht issuance.
Chung Chee Leong, Cagamas: Cagamas is really in the business of issuing bonds. That is the predominant way we fund our purchases of the secondary mortgage portfolio. When we turn to offshore markets, our goal is to capitalise on and achieve lower funding costs, as well as gain a distribution advantage, in the international market against our domestic Malaysian ringgit bond issues. Notwithstanding other factors, the most important criteria in the dynamic of our funding strategy when choosing to head to a foreign market is liquidity.
For example, we actually chose the offshore renminbi market when Cagamas turned to the foreign markets for the first time in September 2014. That was a surprise for many investors, but it was a liquid market and allowed us to conclude a deal without paying the normal new issue premium prevalent in other new issuances. The market seriously needed diversity – most issuers were from China or Hong Kong at that point – and we made the most of that desire. Cagamas has subsequently issued in US dollars, Hong Kong dollars and Singapore dollars at competitive pricing.
We are certainly considering the Thai baht market, given the depth and breadth of the investor base. But one thing that I would like to see, not just in Thailand but in other markets in the ASEAN region, is the mutual recognition of the programmes that issuers' have put in place in their own countries. We have an internationally-rated EMTN programme, rated by Moody’s, that allows us to issue multi-currency bonds under Reg-S format. If we need to go into other markets and effectively start from square one again in terms of documentation and submission, we are going to see costs go up. Instead, we're looking for a quick turn-around time as well as low funding and issuance cost.
Thailand's SEC has been very accommodative to issuers coming into this market. That is good to see. But because we turn to offshore markets to fund ringgit mortgages, we also have to rely on the depth and liquidity of the cross-currency swaps market. We have turned to US dollars, Singapore dollars and offshore renminbi to name a few because these deals were cheaper than our local funding on an after-swap basis; that was the justification. I'm happy to note that Bank Negara Malaysia and Bank of Thailand have entered into a memorandum of understanding, which hopefully should result in CCS market liquidity for MYR/THB direct quotes as we do not take any foreign exchange risk and all our foreign currency issuances are on a fully hedged basis. An efficient and deep cross currency swap market is important for issuers intending to issue offshore but utilise these funds onshore.
Sulaiman, CIMB: This raises an interesting point. Synthetic funding using various currencies can be can explored by issuers as an alternative funding solution. That means looking at markets where prices or spread levels are very encouraging, but where the proceeds raised are not kept in that particular local currency. That relies on very deep swap markets, which we do enjoy in Thailand, Malaysia and Singapore. CIMB has been able to successfully leverage on our regional platform to help our clients identify the most optimal synthetic funding currency to tap that meets the issuer’s objectives in delivering the preferred size and tenor.
AM: It would be good to get an investor's view on the market at this point. What should the priority to be for regulators from a buy-side perspective?
Dr. Win Udomrachatawanich, One Asset Management: We still have plenty of room to grow further in this market. There is still a huge gap between supply and demand, which is going to help this market grow exponentially.
Investment grade bonds in Thailand have been developed for quite some time, and have become quite saturated over time when it comes to investors. This is largely because there are some investors – insurance companies, social security offices and other state institutions – that haven't really developed in terms of their investment guidelines. They still focus too much on very highly-rated bonds.
That said, the high yield market is still vibrant in this country, including triple-B deals. We have been a pioneer of high yield and unrated bonds in Thailand, and this part of the market has grown significantly. We are all very lucky to have seen this market develop as impressively as it has. But everyone in this room should feel confident about how far this market can grow in the future.
The high yield market is going to develop even faster than what we have seen in the past over the next 12 months or so. This is because bonds rated single-A or higher and starting to see yields falling, largely because highly-rated issuers are turning overseas more, reducing supply and putting pressure on prices. But triple-B issuers are still hungry to sell bonds, and they are being supported by the SEC and the central bank.
Unfortunately for this market, most banks are not participating in these high yield or low-investment grade credits. Most of the growth of this market has been driven by securities companies. This has positives and negatives. But we do hope to see banks engage with this market more, which is going to lead to better risk management and better due diligence in the years to come.