Corporate-finance teams are preparing for some late nights in Bangkok as they try to sort out the mess surrounding Thailand’s corporate Eurobond issuers. In a movement akin to plate spinning, bankers are working on delicate negotiations over existing defaults while keeping an eye out for the next hapless issuer about to hit the floor.
Faced with interest payments which have doubled in baht terms as a result of the baht’s depreciation, as well as a cashflow dry-up, a number of Thai issuers are facing the stark choice of restructuring or break-up. The archaic legal system means that for all but the most severe cases the restructuring option seems to be the favoured route among bondholders, spurred on by approaching premium put options and growing uncertainty over whether they will materialize.
Salomon Smith Barney fixed-income analyst Juanita Mayr’s estimate is that 80% to 90% of Thai companies in the Euromarket need restructuring. Most of Thailand’s corporate forays into the Euromarkets have been in the form of convertibles, but with a stock market which has halved in value in the past year and many companies trading below par, their conversion prices are laughable. Issuers are already struggling to meet interest payments and the death knell will be the put options, at least six of which come up for exercise in the second half of this year.
In general, issuers have bent over backwards to meet interest payments on their Euroconvertibles, despite problems servicing domestic debt, because they are terrified of triggering the legal and political wrath of foreign investors. But for property company Somprasong Land and electronics firm Alphatec the cash crunch got the better of them and Somprasong had the dubious distinction of being the first Thai company to default on a Eurobond when it missed a $3.1 million interest payment on its $80 million convertible at the start of last year. Negotiations are on-going with bondholders and trustee Bankers Trust, with talks leaning towards an extension of the maturity of the convertible due 2004. Somprasong earlier offered 10 cents in the dollar to avoid being pulled through the Thai bankruptcy courts.
Just as investors were reeling from the formal declaration of Somprasong’s default last July, Alphatec failed to pay out $45 million on put options on convertible debentures due 1999. Again Bankers Trust has been heading a bondholder move to work out the problem. Mayr reckons the Somprasong approach could turn out to be the model for other Thai restructurings. Somprasong has formed a six-strong advisory committee on which four Thai creditors, plus Bankers Trust and West Merchant Bank, are represented. Equity-for-debt swaps are the plan’s cornerstone.
With those two cases yet to be resolved, investor concern is now turning towards this year’s put options, which start in September with Hemaraj Land and Development’s $60 million Euroconvertible, followed in October by Bangkok Land’s $150 million bond and Thai Central Chemical’s $60 million due. In November, investors will face the prospect of extracting their $50 million from defunct cmic Finance and Securities, while by December, media group Wattachak and NTS Steel are required to cough up $80 million and Sfr55 million ($38 million) respectively. Bangkok Land, long the target of speculation and rumours, faces a double whammy with another Sfr40 million in put options exercisable in March 1999, on top of that due this October.
With most of Thailand’s companies facing problems to some degree or other, the temptation will be for issuers to declare a liquidity crunch and opt for restructuring as an easy way out. While Thailand’s big names the likes of Bangkok Bank, the Industrial Finance Corporation of Thailand and Thai Farmers Bank were able to raise $200 million tranches in the yankee markets in the boom years of 1993 and 1994, the second-rung issuers, many in the property sector, which were looking for smaller sums closer to $60 million, found a ready appetite in the Euromarket.
Stephen Taran, managing director of credit research at Lehman Brothers in Hong Kong, believes those higher-grade yankees are still sound. “Spreads are wide and sentiment is still down, but there has certainly been a change in tone since the Chuan [Leekpai] government came in,” he says. “They seem to be getting down to doing things. They have made all the right noises vis-à-vis the IMF but the economy is taking a severe beating and that will continue for the better part of 1998.”
He identifies several areas of investor concern. There has been worry over a Mexico-style country-wide debt moratorium. Concern number two among investors is the impact of the IMF programme and whether Thailand would abide by it. Ratings downgrades are the next worry, but the ratings have not fallen as hard as those of Korea and with the current account improved, ratings are close to being stable.
With the macro picture under control, investors are now concentrating on specific corporate risks and are tending to be more choosy about their investments. “There is a lot of distressed debt out there and a lot of investors looking at break-up value,” says Taran. Twenty cents in the dollar is the figure bandied about in the worst cases.
On the restructuring front, Thai Petrochemical Industry and TPI Polene have retained Chase Manhattan and Merrill Lynch respectively. The companies continue with cordial negotiations with creditors while paying interest but temporarily suspending principal repayments. TPI has a $48 million Euroconvertible due 2003. Sri Thai Superware is also restructuring and has appointed Banque Nationale de Paris as its adviser in a bid to avoid default on its $60 million of 10-year bonds, issued in 1996.
Another property company MDX, which has $80 million of Euroconvertibles, has also been working on a restructuring plan, while Juldis Development delayed interest payments of $2.5 million on its $60 million Euroconvertible at the end of last year and is in talks with creditors. Gill Baker
