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On paper it didn’t look good. The economic results were poor, Moody’s had downgraded the country’s sovereign debt rating and, at what looked like exactly the wrong moment, the Federal Reserve hiked interest rates. But in April, Thailand managed to launch a US$600 million yankee bond which was actually oversubscribed. Its success followed a series of roadshows in the us presented by finance minister and deputy prime minister Amnuay Viravan, and Bank of Thailand governor Rerngchai Marakanonda. Their mission, to restore Thailand’s flagging image to investors, did not look easy. “There were a lot of sceptics,” admits Stephen Taran, managing director at Lehman Brothers, which lead-managed the issue with Salomon Brothers. Amnuay and Rerngchai opted for honesty as the best policy. According to Philip Bennett, Salomon’s head of international capital markets, their approach was: “We have a lot of problems, we know what they are, and we think they may get worse before they get better.” “There was no attempt at a whitewash,” confirms Bennett. And the frankness paid off, with $1 billion of orders – scaled down to $600 million for the 10-year 7.75% paper, which yielded 90 basis points (bp) over the benchmark US treasury bond. Given the country’s surplus, there has been some debate as to the need to raise funds in this way. But there are infrastructure projects which need financing and the government is finding it harder to balance its budget, so a bond issue looked attractive. It also gave ministers a vehicle with which to go to investors with answers to their questions. “The government, to its credit, didn’t just go into the market to claw back every basis point which had been added to Thailand’s spread in the last six months,” says Taran. “It wanted to address the issues and stabilize the situation.” The downgrade, from A2 to A3, came on the day before pricing. The agency had already cut the country’s short-term rating from Prime-1 to Prime-2 in September. Moody’s justified its latest downgrade by pointing to a build-up of short-term foreign currency obligations, structural problems affecting the country’s exports, constraints on macroeconomic policies, and crises in the financial and property sectors. Moody’s decision ended a period of uncertainty during which some observers had forecast a two-notch downgrade. “In my view that was extremely unlikely,” says Taran. “But the concerns that Moody’s highlighted were very much on the minds of investors as the government went to speak to them.” He goes on: “The issues on which it based its review, and the action coming as it did, helped clear the air.” Standard & Poor’s, meanwhile, stood by its previous credit ratings of a (long term) and A1 (short term), basing its continued confidence in the country on the government’s “substantial financial flexibility”. Salomon’s Bennett agrees with S&S’s assessment. “Moody’s has gone a little bit far because the kingdom has some unusual strengths that give it fundamental creditworthiness,” he says. “Thailand has a track record of prudent financial and monetary policies… It’s true that the country’s macroeconomic levers are still constrained, and from that point of view Moody’s has a case, but we are fundamentally talking about a single a, medium-grade sovereign.” According to Taran, news of Moody’s sovereign rating review, announced in February, widened spreads on the latest Kingdom of Thailand issue by around 5 to 10bp. Additional factors, namely the problems in the finance and property sectors, pushed spreads out a further 5 to 10bp, giving a combined effect of 10 to 20bp. The Federal Reserve’s 25bp interest rate increase on March 25 prompted Thailand to abandon a 30-year issuing option, and put investors on the defensive. Some of the bigger insurance companies were playing particularly hard to get, putting forward an ‘all or nothing’ scenario under which they would agree to take, say $50 million at 90bp over the treasury, but nothing at all at 89bp. “They didn’t want to take a chance of erosion with the rising yield on the treasury, but they liked the story and wanted to buy the bonds,” says Taran. “There were other investors in the market who said there were so many difficulties in Thailand it was going to take them 100bp to play… But at 60bp, a price some say the issue would have achieved had it been launched two months earlier, it would have left a very large group of investors very angry.” The Thai delegation was not helped in its marketing efforts by the recent spectacular fall from grace of Somprasong Land, which defaulted on $3.1 million of interest due on its $80 million Euroconvertible. Amnuay and Rerngchai also had to deal with investors’ criticisms of the government’s handling of the economy as “piecemeal and oriented towards the short-term,” says Taran. The ministers explained the government’s plans to rehabilitate low value-added industries such as textiles, to develop new industries such as electronics in the medium term, and to upgrade and expand education. Investors were also alarmed at the amount of money they could see being pumped into the finance sector. “Some investors saw this as a lot of taxpayers’ money going down the drain to bail out their buddies,” says Taran. The government response was to assure investors that the funds being used to support financial institutions were being provided by the banks and through domestic bond issues. In addition, loan collateral was being reappraised and the original lenders would retain 50% of the contingent liabilities on the reappraised value. Apparently satisfied with this, 60 to 70 investors finally placed orders. The largest proportion of investors (70%) are from the us, with 20% coming from Asia and 10% from Europe. The investor profile was heart-warming. Notwithstanding the good range of non-us investors, some 40% of purchases were of the ‘buy-and-hold’ variety of pension funds and insurance companies, while around a third was taken up by the fund mangers who trade on a regular basis and provide liquidity for the issue. The remainder went to bank portfolios and some non-Thai central bank buying. Taran was particularly gratified to see the increasing role of Asian and European investors in the yankee market. Goldman Sachs was noticeable by its absence. “They were never part of the deal,” says Taran. The co-manager’s group was kept small, confined to Merrill Lynch, Morgan Stanley and JP Morgan, in order to avoid conflicting messages going out to investors. The country’s big three banks, Bangkok Bank, Thai Farmers Bank and Siam Commercial Bank, already had subordinated Rule 144A issues in the market. They benefited from the sovereign issue oversubscription, which prompted an overspill into the banks’ paper. Their spreads, along with those of the Industrial Finance Corporation of Thailand and ptt Exploration and Production, narrowed by three to five basis points. According to Bennett, certain Thai banks are now considering new issues in the yankee market on the back of the sovereign success. But was Thailand’s bond too cheap, especially in the context of the Philippine’s $1 billion 30- and 100-year issues, which were abandoned shortly after Thailand’s success? “If it were given away we would have seen the spread tighten by five to 10bp. In fact it tightened two basis points, which was an indication it was just where the market wanted it to be,” says Taran. Thailand’s issue was priced on the day the Philippines began its roadshow, but the US producer prices index was announced the following day. For the first time in six years there was a whiff of inflation, causing a large shift in market perceptions and an adversity to long-term debt. “The Philippines decided the price they would have to pay was not one they were comfortable with,” says Bennett. “Thailand could have raised $200 million over 30 years but the spread difference against a 10-year issue would have been 35 to 40bp, when normally it would have been nearer 25,” adds Taran. The last time Thailand launched an issue in the yankee market was in 1992. This year’s issue was the result of a fundamental shift in government policy, which is expected to provide for annual issues from now on. The government sees the importance of maintaining a benchmark and keeping its name in investors’ consciousness. A good name may be hard to maintain, however, given that Thailand’s problems seem far from over. “Some people really had a limited understanding of what is going on in Thailand other than the headlines,” says Bennett. “It is very important to be honest and up-front – to recognize the problem and design the programmes that usefully counteract those problems. Thailand’s economic management team did just that.” But, as Bennett admits: “Nothing is ever as it seems, or stays the same – the market was forewarned the situation was a dynamic one.” In May, as if to prove the point, property developer Natural Park defaulted on interest and principle repayments on a loan to Thai Fuji Finance and Securities, while One Holdings, the investment arm of Finance One delayed Bt90 million ($3.5 million) of interest repayments on debentures. . |
