Asiamoney roundtable: Thailand tackles infrastructure investment

Panelists:

Tada Phutthitada, president, Thai Bond Market Association

Yingyong Nilasena, deputy secretary general and chief investment officer, Government Pension Fund

Sukkawat Prasurtying, chief investment officer, AIA Thailand

Narongsak Plodmechai, managing director and chief investment officer, SCB Asset Management Co

Lertchai Kochareonrattanakul, senior director, corporates and funds, Fitch Ratings Thailand

Lee Swee Eng, chief executive officer, KNM Group

Dr. John Millar, chief strategic development officer, Ananda Development

Vikit Kachonnarongvanich, senior executive vice president, Government Housing Bank

Anwar Harsono, executive vice president and head of finance, Bank CIMB Niaga

Sutee Losoponkul, senior executive vice president, treasury group head, CIMB Thai Bank

Nor Masliza Sulaiman, global head, capital markets, CIMB

Boo Hock Khoo, vice-president, operations, Credit Guarantee Investment Facility

 

Moderator: John Loh, senior reporter, GlobalCapital Asia

Asiamoney (AM): Thailand has seen increased capital inflows since Brexit as international investors rotated out of developed markets and into emerging market assets. What is the spillover impact on Thai financial markets, especially rates and foreign exchange? Do you expect any action from Bank of Thailand on interest rates?

Sutee Losoponkul, CIMB: BOT may not use interest rates to manage foreign exchange but they seem to be shifting to a more relaxed policy stance to counter capital inflows. The government recently expanded the qualified investor list so that more people can bring money out and BOT also loosened restrictions on hedging and allowed people who have no underlying to hold foreign currency deposits of up to $5m. The treasury centre is also coming up with a scheme to allow international headquarters to have treasury centres in Thailand so they can more easily manage foreign exchange inflows and outflows by netting currency flows and buy/sell only for the residual amount. This should help stabilise foreign exchange rates. Besides, BOT also came into the market to stabilise exchange rates. As you can see, although BOT’s foreign exchange reserves have jumped in the past six months to $25bn, in baht it didn’t move very much.

AM: What is Fitch’s outlook on corporate credit? How have external events like Brexit and the Federal Reserve affected investor appetite for corporate bonds? How are Thai investors managing their domestic bond portfolios amid the current volatile environment?

Lertchai Kochareonrattanakul, Fitch: Most of our ratings outlooks on Thai corporates are stable at 80%, while 20% have a negative outlook. This is mostly due to company-specific issues. Last year we downgraded one credit with a negative outlook because it made a large debt-funded acquisition. We also recently put one company on rating watch negative due to an acquisition it made outside of Thailand that will weaken its credit metrics.

We have a negative view on some sectors like upstream oil and gas because of oil prices, and telecommunications due to margin pressure and heavy capital expenditure needs. However, the ratings outlook of these companies are stable due to their strong financial positions to weather the challenging operating environment.

Yingyong Nilasena, GPF: Investors need to get used to ‘lower for longer’, surplus liquidity and low interest rates for some years to come. So we try to find alternatives. Five years ago we started to invest in infrastructure locally and internationally, and in property as well. The return pattern has been somewhat bond-like in giving us a steady income. For bonds, we have a cautious outlook as credit spreads are too tight. This could last for some time, so we are sticking to high grade bonds. For government bonds, we have to do more trading or curve shifting to try to make more money from low returns.

Sukkawat Prasurtying, AIA Thailand: We have been anticipating a ‘lower for longer’ environment and have shifted some of our funds to invest offshore. The new regulation allows us to invest in offshore corporate investment grade bonds where there are wider spreads compared to Thailand. Credit spreads for domestic bonds have been too tight for a while. That’s why there are good opportunities for issuers to raise money. When we compare bond and dividend yields in Thailand, there is 100bp pickup with upside if you invest in equity. It doesn’t make sense to invest in Thai bonds at the moment.

Narongsak Plodmechai, SCB: If you look at the mutual funds that have raised big funds recently, almost all of them have big allocations for foreign bonds. This is because foreign bonds with the same quality of credit pay better returns even after swapping back into baht. That’s a problem for infrastructure projects which require longer-dated funding, as the mutual funds have short-term liabilities. It comes down to what’s in it for the investor. Some innovation for bond underwriting is needed where the visibility of cash flows for the asset is shown and offers investors some margin of safety to invest for the longer term. It has to be give and take.

AM: For Government Housing Bank, what is your outlook on the housing sector in Thailand? How has this affected your funding plans?

Vikit Kachonnarongvanich, GHB: We have noticed that the government’s housing stimulus package launched last October has boosted the housing market significantly. New home transfers jumped to 22,400 units in November 2015, and increased to the peak in April this year for 32,500 units, compared to the average of 14,600 units for the past 10 months before the scheme launched. As of the first quarter of this year, new mortgage lending in the housing market was up 3.5% year-on-year. Government Housing Bank’s new home loan growth is about 9.9% compared to the same period last year. We plan to increase housing loans by Bt170bn ($4.8bn).

The important thing for us is how to allocate our excess funds to loans. At the same time, we have to be careful that these loans don’t turn into non-performing loans. As we are a bank, our main funding is from deposits which increase every year in order to support our loan growth. However, we also plan to issue bonds of around Bt26bn this year.

AM: The Greater Bangkok property market is seeing continued growth amid public investment into infrastructure and new mass transit lines. How does this affect Ananda’s funding plans?

Dr. John Millar, Ananda: From just a tiny company a few years ago, we are now the largest developer by sales of condominiums in Thailand. We are aiming to triple in size by 2018, so it looks like we are an aggressive company. But the management is actually quite paranoid and we spend far more time planning to prevent something from going wrong, because we’ve lived through two financial crises and natural disasters. That’s why we focus on building around the mass transit system – not because it’s the best growth opportunity, but because it’s the safest.

The fact that the government continues to build public transport infrastructure acts as an exogenous generator of demand that’s independent of the property and GDP cycle. It’s got to a scale now where there are 67 stations open and this number will grow to 119. The next set of contracts will take this to over 220 stations.

AM: Malaysia has had a challenging two years due to falling oil prices and weaker consumer sentiment. From KNM’s perspective, what is the outlook for the economy and private investment in Malaysia, especially with Petronas pouring billions of dollars into its Rapid project?

Lee Swee Eng, KNM: We’ve been blessed in a way with Petronas’ Rapid project because despite global volatility, a downstream project like Rapid is very feasible as feedstock like oil and gas is cheaper now. Because the project involves a huge amount of investment, it is being phased out. The first phase alone needs $27bn, and this is keeping a lot of suppliers like us very busy. In addition to that, the central bank is forecasting moderate economic growth and public spending is also increasing, so we see a lot of opportunity in Malaysia. There is a huge opportunity for our renewable energy business in Thailand too because the government has a strong mandate till 2036 for bioethanol projects. We also understand that new regulations are coming up for waste-to-energy in Thailand. AM: What is the near-term outlook for Indonesian banks, especially after Bank of Indonesia’s multiple rate cuts? How are Indonesian banks positioning for further growth in view of the stimulus measures from the government and central bank?

Anwar Harsono, CIMB: Indonesia’s GDP has been slowing but we believe that a rebound will come in 2016. The government expects GDP to grow 5.5% in 2017 due to a series of 15 stimulus packages. Like Thailand, we also have mass transit and other infrastructure projects which are starting now. All this is helping the economy.

The consumer index and government spending is picking up, and GDP is looking better for the second half of 2016. The tax amnesty to reduce the tax rate from 30% to 2% that was passed recently is big news for Indonesia as it is expected to attract repatriations, which can be used for infrastructure. The government is targeting $74bn in repatriations, and this is expected to help its 2016 infrastructure budget. There are infrastructure programmes that have already been contracted.

We believe Bank of Indonesia’s rate cuts are not over yet as banks have been mandated to pursue single digit loan growth, and we could see a rate cut in the second half of 2016. Industry loan growth has been slowing down in 2015 and 2016. Before that it was always above 20%. Loan growth last year was 10% and in the first half of 2016, 9%. Rate cuts will benefit the whole industry. Banks are already booking higher net interest margins as most of the funding for Indonesian banks is through one month customer deposits, so the cost of funds is coming down.

AM: ThaiBMA estimates that corporate issuance this year will reach a new record. What opportunities do you see for issuers? Is ThaiBMA close to firming up the policy for MTN programmes?

Tada Phutthitada, ThaiBMA: Last year we forecast that corporate bond issuance in 2016 should reach Bt520bn. We faced a Bt100bn outflow situation last year, but this year we saw inflows of around Bt110bn since the first quarter after Japan’s negative interest rate policy. There are other factors leading to continued inflows into Thailand's bond market. Brexit and the Thai constitution's referendum mean that low interest rates will continue for longer than expected. Companies that are undertaking M&A are also expected to issue bonds to refinance their bridging loans. Meanwhile, we understand that new businesses want to tap the bond market like 4G operators and renewable energy. We expect corporate bond issuance this year to hit a new record and exceed Bt600bn. In April last year, the regulators also approved the introduction of an MTN programme in Thailand and sent it to the supervisory board in the third quarter of 2015. But because at least 10 notifications need to be revised, the MTN programme may only be introduced in the first quarter of 2017.

AM: Supply continues to be a problem for the baht bond market with demand growing at twice the speed of supply. What is ThaiBMA doing to address this gap and the fact that deals tend to be too small for institutional investors?

Phutthitada, ThaiBMA: According our survey, the average annual demand for bonds exceeded supply by at least Bt600bn per year. And until the end of 2014, only 300 companies issued bonds in Thailand. By the end of 2015, this increased to 400 companies. Securities companies that underwrite bonds in Thailand have also increased to 30 from five in 2014. However, less than one-fifth of Thailand-listed companies have issued bonds. That’s the problem we have right now.

ThaiBMA is conducting one-on-one visits, seminars, TV programmes, and we are also on Facebook and YouTube to provide awareness to companies to issue bonds and to securities companies to underwrite bonds. We are also talking to the SEC about introducing an MTN programme, and are asking the SEC to allow Thai companies issuing bonds offshore to simultaneously offer them onshore with the same documentation. The SEC has agreed that issuers can use the same English documentation, but with the condition that the bonds are only sold to institutional and high net worth investors.

We now have a baht bond framework for foreign issuers, but we are asking the PDMO to consider allowing foreign companies that invest in CLMV (Cambodia, Laos, Myanmar and Vietnam) countries to be able to issue bonds in Thailand using SEC regulations without going through the foreign issuer framework.

Nor Masliza Sulaiman, CIMB: As debt capital market originators, we are enthusiastic about bridging the demand-supply gap. We have seen an improvement in corporate issuance volumes. Up to July 2016, corporate bond issuance grew 32% year-on–year, and that’s extremely encouraging. The beauty of the Thai corporate bond market is that there is a very healthy amount of bond issuances within the ‘A’ range, averaging about 50% over the last four years. Even the ‘BBB’ and below range averages about 20% over the same period from 2012.

When compared to neighbouring countries, that’s an extremely fantastic achievement, as issuance in a lot of ASEAN countries are predominantly in the high grade space, comprising AA-/AA3 and above-rated issuances on their respective local rating scales. One thing that can be done to increase supply is the introduction of the MTN programme format. The ease of tapping the market is likely to facilitate more bond issuance and reduce potential issuers’ dependence on the loan market. An MTN programme significantly reduces the time to market for issuers. The typical issuance process now requires eight to 11 weeks. That’s a relatively long timeline and can be shortened for regular issuers.

With the existence of a shelf registration programme or MTN programme, this timeline can be cut down to one to two weeks for repeat issuers. This gives issuers the ability to reduce negative carry, avoid unnecessary documentation, reduce incidental cost and raise funding either via private placements or a bookrunning exercise from the bond market whenever the market is conducive to achieve optimal rates. Even in Indonesia, they have in the past introduced shelf registration programmes with a validity period of two years. In Malaysia, MTN programmes provide the flexibility for much longer tenors, with some going up to 60 years.

If you look at the statistics of loans versus bonds, the loan market in Thailand is thrice the size of the bond market as at June 2016. The size of the loan market in Malaysia is only 1.35x the corporate bond market, and the outstanding corporate bond market size is equivalent to about 50% of the country’s GDP. If we can disintermediate credit participation from banks to investors, the increased supply can provide the market not only diversity but also close the gap on rates.

Even in project bonds, where you have good projects and cash flows, the beauty of disintermediation is that the return on investment is higher and you can lock in longer-term investments at higher returns. If we can facilitate higher participation of project bonds in the capital market, issuers can focus on non-recourse financing and reduce single customer limit risk. If it’s a joint venture with other project sponsors, project bonds can reduce the contamination of credit as the ring fencing structure protects the other assets or businesses owned by the project sponsors from winding up or receivership events.

On the flip side, in cases where the project’s credit is stronger than the project sponsors’ credit, investors will benefit from the direct participation in the project cash flows instead of taking on the project sponsors’ credit risk.

AM: Government Housing Bank will be the first Thai state-owned enterprise to issue bonds under the Securities and Exchange Commission Thailand’s filing procedure, where bonds without a government guarantee are required to prepare prospectuses for regulatory submission. Can you share your experience and suggestions for how this process can be improved? Kachonnarongvanich, GHB: We have already issued Bt20bn, for which CIMB was an arranger, and next month we are preparing for a Bt6bn bond to be submitted to the SEC. It helps us to widen our customer base. After submitting twice, it’s not so complicated to do the filing. But maybe the SEC can charge less for bond issuance from SOEs, such as in the case of ThaiBMA which does not require us to pay the listing fee.

AM: Ananda recently issued a perpetual bond of Bt1bn. Do you see growing interest for perps among investors? How was investor engagement during the process?

Dr. Millar, Ananda: Our experience on the most recent perp was very different from the first time we issued it. Ananda was the first in the world to market a renminbi-denominated perp. Unfortunately, just as we opened books the protests started, so we couldn’t complete it. But we used that experience and the work that we’d done talking with ratings agencies, banks and analysts to issue the first baht perp from a real estate company. We still had to do a lot of work talking to the various stakeholders, educating and negotiating with them. Ratings agencies for instance were as firm in their opinions as they should be. Then we issued a second perp earlier this year and it was completely different. I turned up for the roadshow with high net worth individuals and I could tell straightaway that they weren’t listening. They were just fighting for allocation.

What I can say from practical experience is that issuing a perp now has become as much work as issuing a regular bond. The greatest compliment I can give to everyone who’s involved in the bond market in Thailand is that we don’t think about it, because the performance of the bond market is predictable. It doesn’t distort our investment decisions. We know that as long we keep within certain rules, the bond market will deliver the funds. As this most recent perp shows, the market is capable of absorbing new types of instruments and normalising them very quickly. That’s an encouraging sign to us as a corporate in Thailand because it allows us to manage our balance sheet using different instruments.

AM: Project bonds are still in the early stages of development in Thailand. Are there any plans to develop this further? What can Thailand learn from its neighbours?

Phutthitada, ThaiBMA: We have submitted a proposal for project bonds to the PDMO that can be used by SOEs and corporates in Thailand. Originators need to provide subordinated loans to the special purpose vehicle and the latter can use those proceeds to buy the assets as well as for the dynamic pool of assets to ensure quality of collateral. For investors, there are three levels of protection – the asset pool, the dynamic pool, and the guarantee from the originator. We have posed this to the authorities, but given the demand-supply situation our SOEs can issue plain vanilla bonds with a lower cost.

Project bonds can help address the government debt situation as it is not counted as public debt. Private companies can also use this structure to achieve the same cost as direct borrowing. The bad news is that project bonds are competing with infrastructure funds which have tax benefits, while project bonds are subject to 15% withholding tax on interest income. This is why issuers are still reluctant to issue project bonds. Secondary Mortgage Corporation has issued using this structure, but the cost was a bit higher than a straight bond.

Sulaiman, CIMB: Malaysia has been fortunate to be able to grow its project finance bond market. About 41% of all corporate bonds issued so far this year are infrastructure-based. The breakdown of infrastructure funding is also diverse, with issuance coming from the power, toll road, transportation, water and ports sectors.

Thailand has a huge need for infrastructure investment. If we can facilitate the funding for these infrastructure projects via project bonds, then investors can participate, sponsors can have non- or limited-recourse financing, and banks can free up their single customer limitations. This would work well for the government too as the funding will not constitute solely of public debt. This disintermediation of credit away from banks means that systemic and concentration risks are reduced. Infrastructure bonds in Malaysia are also financed across multiple tenors, with 40% of issuance between 2011 and the year-to-date in the 11-20 year range and 22% of issuance above 20 years.

The beauty of a very liquid market is that investors don’t necessarily have to match their investment horizon with the issuance tenor. Even fund managers and corporates are heavy participants in project finance bonds in Malaysia. Given the secondary liquidity, it isn’t just pension funds that are interested but banks too. The ability to have long-dated tenors means that the project

can be funded based on its project cash flows. You can have serial bonds where if the concession period is 50 years, the bond tenor can be stretched out to 25-30 years. This improves the internal rate of return for project sponsors, and the funding cost becomes more attractive because negative carry is reduced, and issuers are able to stretch out the issuance tenor to match their cash flows. IRR is also stable because project bonds are typically fixed rate funding, unlike the loan markets where borrowers have both refinancing and interest rate risk. On the other hand, investors can participate in bonds that have tenors of 15 years or higher where returns tend to be more enticing compared to a 10-year bond that is rolled over for the same comparative tenor. A typical project in Malaysia is funded on a debt-to-equity ratio of 80:20 or 70:30, with the debt portion primarily funded through the bond market because of the fixed rate funding cost and the serial redemption structure. The remaining 20% to 30% is funded by equity and in some cases via a junior debt structure, so it is extremely efficient for project sponsors.

For the government, a successful project finance is when it reduces the cost of infrastructure. If you want additional comfort for non-recourse financing, a definite contingency buffer can be included in the project cost to cover any potential cost overruns. On a limited-recourse basis, during the construction period some bonds benefit from a construction completion guarantee from the project sponsors to cover cost overruns and delays, and in some instances post-completion, liquidity support can also be provided by the project sponsors. From a single customer limit point of view, there will be no contamination of credit. For example, in Malaysia, it is possible for an 'A' rated project sponsor to issue a project bond that’s rated 'AA'.

AM: Will ratings or credit wrapping by agencies like CGIF make project bonds from Thai corporate issuers more attractive to investors?

Boo Hock Khoo, CGIF: I’m often humbled by the development of the bond market in Thailand. It is one of the more developed markets within CGIF’s focus. When I began my career in a rating agency, we rated the first independent power producer bonds in Malaysia and the first project bond for a highway concessionaire in the early 1990s. So it took over two decades for project bonds to reach their current stage in Malaysia.

But Thailand can do all this in a couple of years given the well-developed baht bond market, ample liquidity and the need for infrastructure financing. It’s a matter of aligning the interest of stakeholders – government, regulators, ratings agencies, investors and project sponsors. To get started quickly, the most powerful thing a country can do to encourage the project bond market is to look into the tax structure.

For priority infrastructure projects, the government can focus on eliminating all the current tax disincentives as well as providing incentives to move things more rapidly. For CGIF’s role, given our small size, what we can do is only catalytic in nature. We recently launched a construction period guarantee programme with the aim of mobilising long-term conservative investors to buy greenfield bonds with our full guarantee during the construction period. For us, it’s not only about wrapping the construction risk but also developing a framework to measure construction risk. Our view is that if the construction programme is well put together, the risk is low. We want to get good projects out to the capital markets and that means projects where the risks are well managed. This is crucial as the reality of the bond market is such that if the first project fails, then the whole market goes away rather quickly.

AM: Thai investors, especially fund managers, are savvy at locking in higher returns from cross-border investments. Are there opportunities for investors to profit from the recent volatility?

Losoponkul, CIMB: Unfortunately, there is not much opportunity at this moment from our nearby countries. Some investors may not want to touch Indonesian bonds because Indonesia still doesn’t have an investment grade rating from all international rating agencies, although it has good potential to be upgraded in the future. While there is no pick up in Malaysia, Indonesia or Singapore bonds currently, but look back at the past three years and you can see that ringgit bonds have seen a pick-up of 20bp-30bp after being swapped to baht compared to local Thai sovereign bonds, even though Malaysia has a higher rating than Thailand.

My message here is the market is always changing and different opportunities come up from time-to-time. At present, some short tenors of Japan sovereign bonds can give a better pick up than Thai Treasury bonds after swapping the proceeds back to baht. So investors may have to change their strategy.

AM: What is the profile of foreign investors in the Thai bond market? Is Thailand prepared to review its withholding tax framework to encourage stable inflows from long only institutional funds, including from ASEAN, into its government and corporate bonds?

Phutthitada, ThaiBMA: The foreign holding of Thai bonds is over Bt500bn compared to the peak of around Bt800bn in 2013. Around 14% of Thai government bonds outstanding is owned by foreign investors. The foreign inflow into short-term central bank bonds peaked at Bt120bn, but stands at Bt100bn now. When there are outflows, foreign funds usually don’t sell in the secondary market but wait until bonds expire. So when we experience outflows, there is not much impact on our market.

AM: How do Thai institutional investors feel about expanding their credit risk and allocation to other ASEAN bond markets? What are the issues and challenges for Thai investors looking across the region?

Plodmechai, SCB: Currency hedging is the key issue when it comes to investing overseas. Hard currencies like US dollars, euro or yen are the cheapest and most liquid for trading. For Asian bonds, currency hedging for ringgit bonds, for instance, remains an issue. Certain approvals need to be granted before transactions can be done and counterparties are quite limited. That makes trading Malaysian bonds more expensive than Indonesia or the Philippines.

Looking into frontier markets like Vietnam, government bonds account for 95% of the market and liquidity is very thin. That makes cross currency trading even more difficult. The last issue is settlement. It’s still not easy to buy an ASEAN local currency bond and settle them with a regular custody bank. It’s a tedious process to do this on a regular basis. It’s an obstacle we need to overcome.

Prasurtying, AIA Thailand: We started investing offshore more than 14 years ago and around 99.5% of our offshore bond portfolio is denominated in US dollars. We want to invest in local currency bonds outside of Thailand as well, but the two-leg swap can be very expensive as the regulations require us to hedge any foreign currency investment back into baht. We will continue to invest offshore but will diversify away from Asia. It’s much easier to find longer-dated paper in the US for example.

On infrastructure, we know that public-private partnerships will make up 20% of total funding, and about Bt360bn could come from project bonds. CGIF could also help us invest in greenfield projects if the construction risks are mitigated. The total invested assets for some of the insurance funds present here today is more than Bt1.4tr. We can easily fund these projects locally. The key is that we need a regulatory framework that promotes these very important projects. Today is an opportune time as we have representatives from the BOT, Office of Insurance Commission and the Ministry of Finance as well as various types of investors. We need to work together to have a regulatory framework that can make these projects happen. As an insurance company, our liabilities match infrastructure investments perfectly. Unlike banks, we want duration. If we want to take this opportunity to move the country forward, the regulatory framework is the main issue that needs to be resolved. The key is we have to do it in a holistic way and eliminate all the obstacles to take our country to the next level.

Sulaiman, CIMB: As Khun Sukkawat mentioned earlier, it has to be a holistic proposal. For project finance to work, it has to be predicated on a stable concession agreement where the ratings agencies are able to evaluate the certainty of cash flows. One way to encourage activity in the bond market is by introducing more tax incentives to both issuers and investors, such as stamp duty exemption and establishment cost deductions like in Malaysia, as well as tax breaks for investors. These would be critical to make sure project finance takes off in Thailand.

AM: Primary and secondary rupiah bond markets have been particularly active in recent months. How does CIMB Niaga benefit from this rapid growth and stronger foreign investor appetite? What are CIMB Niaga’s funding plans for this year?

Harsono, CIMB: Government bond yields have come down since the ratification of the tax amnesty law. Foreign interest in rupiah government bonds is still increasing, as seen from non-resident ownership as of August 15 of Rph669.5tr, up from Rph558.5tr as at December 31. Non-residents currently hold 39.5% of total tradable Surat Berharga Negara outstanding. Combined with the tax amnesty policy, which is expected to boost the government’s fiscal capacity to finance development programmes, this can potentially enhance national economic liquidity. CIMB Niaga as one of the major banks in Indonesia views this as a sign of economic improvement that can increase the bank’s asset and liquidity. With the positive environment and upcoming maturity on our previous issued senior bonds, the bank plans to issue domestic senior bonds denominated in rupiah this year to support our growth and as alternative funding.