Thailand's 'super rich' join bond rush

Thailand’s millionaires are helping their military leaders revive lending as legal and political certainty spurs the super-rich to buy riskier bank debt.

Thai banks have offered $1.6 billion in subordinated notes that cushion their balance sheets since the government made it clear three weeks after the May coup that high-net-worth investor purchases are allowed, data compiled by Bloomberg show.

TMB Bank Pcl, formerly known as Thai Military Bank, plans to sell 15 billion baht of securities today that can be converted into stock if it suffers financial stress, the largest local sale under Basel III rules Thailand adopted in January 2013.

Thailand's military regime is trying to nurture an economic recovery by allowing wealthy investors to take advantage of higher returns on riskier debt. TMB's securities offer 5.5% compared with an average 4.3% coupon on financial bonds issued this year.

"Banks have to rely on the high-net-worth individual investors" for subordinated sales as institutions must class the notes as junk holdings, said Kowit Adireksombat, a senior associate at Baker & McKenzie LLP in Bangkok. "All of the bonds sold so far comply with the requirements to allow them to be sold to" such individuals, he said.

Sales Halt

Thai banks didn't conduct any large subordinated-bond sales to the public from the start of 2013 until June this year as lenders grappled with unclear regulations. The Securities and Exchange Commission issued notices on June 16 confirming that high-net-worth individuals and institutional investors could buy such bonds.

"A lot of banks expressed interest in issuing Tier 2 late last year but they were told to wait until the regulators had clear rules," Doungporn Prasertsomsuk, senior lawyer at Clifford Chance LLP in Bangkok, said.

Three days after the clarification, Thanachart Bank Pcl sold 13 billion baht of 10-year subordinated bonds carrying a 6% coupon to local investors. On the same day, Krung Thai Bank Pcl sold $700 million of 10.5-year Basel III-compliant notes denominated in US dollars to international buyers offering a 5.2% coupon.

Bangkok-based Kasikornbank Pcl is also planning its first issue of Basel III-compliant notes, denominated in baht, according to a Fitch Ratings Ltd statement yesterday.

The SEC became "flexible on sales to high-net-worth individuals" of such bonds after the change of government, said Ariya Tiranaprakij, executive vice-president at the Thai Bond Market Association. While the industry body expects more local subordinated sales now that rules are clearer, the notes still can't be sold to retail investors and require a suitability test, she said.

Thai banks had about 270 billion baht of outstanding subordinated debt classed as Tier 2 capital at the end of 2013, nearly all of which are Basel II securities, which will drop by 30% this year due to maturities or legacy issues, Fitch said in a June 9 report. A further 53 billion baht will expire next year.

"This suggests that Thai banks will need to issue significant amounts of Basel III Tier 2 instruments to replenish their capital," the ratings company said.

Full Losses

Lenders raised more than 100 billion baht in subordinated debt in 2012, according to Chatri Sotangkur, executive vice- president and head of group treasury at Siam Commercial Bank Pcl. Most were sold to high-net-worth investors, he said.

Since the adoption of Basel III rules, Thai banks can only count subordinated bonds as capital if they include a clause that converts them into equity or imposes full losses on investors if the company faces financial difficulty.

The economy grew 0.9% in the second quarter as demand recovered after the military coup ended unrest. Gross domestic product shrank 1.9% in the first quarter. The baht has risen 2.5% over the last three months, the best performing currency in Asia. Thai local-currency sovereign bonds gained 8.5% in the past year, lagging Indonesia's 10.5%, according to Bloomberg indexes.

The nation's lenders are well-capitalized with an average tier 1 equity buffer of about 11.6% at the end of March, according to Fitch. An increase in non-performing loans to 2.3% of assets in the second quarter and maturing debt that counts as capital should be an incentive for more issuance.

Loan growth in the first quarter dropped to a third of the rate a year earlier, according to data compiled by Bloomberg. Under new rules, banks need to raise capital in order to increase lending or cope with higher bad debts.

"Thai banks are likely to make use of both the onshore and offshore markets to raise Basel III subordinated debt capital in the coming years," Sean McNelis, managing director and head of the financing solutions group at HSBC Holdings Plc, said.

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