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Thai SEC warns of risks related to short-term corporate debt
[SINGAPORE] Thai authorities have warned investors of growing risks related to corporate bills of exchange (BEs) after a spate of defaults in the 262 billion baht (S$10.52 billion) short-dated bond market.
The Securities and Exchange Commission (SEC) has held several discussions over the last two weeks with issuers of BEs, selling agents and asset management firms that buy the paper. "The SEC is of the view that bills of exchange is still an important funding channel for companies," Pariya Techamuanvivit, SEC's director of corporate communication and investor education, told IFR. "BEs or unrated bonds are currently allowed to be sold to limited groups of investors, so the impact is limited and we expect the market to make adjustment (to the situation)." Typically, BEs have tenors of less than one year and are privately placed to a group of less than 10 investors, comprising only institutional and high-net-worth investors. However, retail investors are indirectly exposed through mutual funds, which also buy BEs.
There have been five defaults in the last two months, although the first company to default - newspaper publisher Nation Multimedia Group - has since repaid the concerned 50 million baht note. In addition, KC Property , Inter Far East Energy Corp, E For L Aim and Rich Asia Corporation defaulted on securities with a combined value of 450 million baht.
This amount is just a drop in the 2.96 trillion baht of short-term and long-term corporate bonds outstanding. However, the Ministry of Finance is keen to avoid contagion and has instructed the SEC to tighten regulations around BEs. "The government is warning all investors and asset managers to be careful about purchasing the short-dated bills," said one Thai fund manager. "We have been warned that more defaults could be expected among the small and unrated issuers that have sold bills of exchange." There are some 220.6 billion baht of outstanding BEs, of which 68 per cent are rated, according to the Thai Bond Market Association.
Continuing defaults will reduce demand for these instruments, pushing issuers towards other, more expensive, financings, such as bank loans. "There are concerns among some investors over the defaults and investors seemed to have shifted from high-yield risk investments to safe assets," said Ariya Tiranaprakij, executive vice president of the TBMA.
Companies paid coupons of about 5 per cent when they issued the BEs, half the 10 per cent they would have to pay if they borrowed from banks. In addition, the short-term notes require fewer covenants than bank loans or longer-dated bonds.
Less demand for BEs will hit smaller companies, which are already grappling with rising interest rates.
These issuers could struggle to roll over or repay debts, resulting in more defaults.
Such concerns have prompted the SEC to step in. It has asked corporate issuers to assess their financial health and liquidity and to consider alternative funding channels. A reminder was also sent to selling agents to comply with the sales conduct rules and to provide sufficient product information to allow investors to understand the risks.
Asset management companies that launch funds to buy the BEs are also required to set up an investment management system to monitor the investments. "We also plan to discuss with stakeholders whether any additional rule changes are needed," said the SEC's Techamuanvivit. "In such a case, public consultation will surely be conducted." There is a strong possibility of more defaults on short-term corporate notes. According to a research note from Maybank Kim Eng Thailand, 30 out of 49 issuers with BEs due in the first quarter have an Altman Z-score, a formula that predicts the likelihood of bankruptcy, of the borderline level of 1.8. Of those, Maybank expects four to face strong default prospects due to weak business outlooks, negative free cash flows and high leverage ratios.
However, the real crunch is expected to come in September, when a far bigger proportion of the BEs are due to mature.