Book building began today for a landmark domestic currency transaction by the Export-Import Bank of Thailand (Thai Exim). The government-owned bank's Bt5 billion ($128.3 million) two tranche offering is a highly symbolic example of the difficulties faced by the international bond markets in trying to attract quality Asian issuers.
It shows that even those borrowers with genuine foreign currency needs would rather stick to their home markets and then swap the proceeds - rather than face the prospect of higher funding costs and cautious international investors, who are still mindful of an Asian premium in their pricing demands.
Thai Exim was lined up by the government last autumn as the only likely state-owned candidate to have an offshore funding allocation from its $5 billion programme for the year 2000. However, rather than raise its $100 million in the Asian floating-rate note (FRN) market as would have been the case before the regional financial crisis, Thai Exim has instead opted to raise baht and then swap the proceeds, achieving a post swap funding level believed to be about 50bp through Libor.
Given that five-year dollar swaps stand at about 100bp, this would assume a fixed rate spread over Treasuries around the 50bp level, a significant cost saving over the current outstanding dollar benchmarks from Thailand. The Kingdom itself, for example, has 2007 and 2004 benchmarks trading at respective spreads of 200bp and 170bp over Treasuries, while IFCT has a 2007 benchmark at 255bp over.
Helped by corporate conversions
Bankers say that Thai Exim has been able to save roughly 200bp because of the huge numbers of corporates trying to convert their existing dollar exposures back to baht. Says one local banker: "Thai Exim is sitting on the other side of the swap because it wants to convert baht to dollars."
The transaction, which will close on 15 June, comprises one Bt3 billion tranche of three-year paper with an indicative yield of 4.90% to 5.25% and one Bt2 billion tranche of five-year paper with an indicative yield of 5.90% to 6.25%. Joint-lead managers are HSBC Markets and Thai Farmers Bank.
The plain vanilla structure mirrors Thai Exim's Bt5 billion two tranche deal of April 1999, which was completed with respective coupons of 6% for a three-year tranche and 7.25% for a five year.
Indicative pricing for the new issue has been described as tight by domestic investors, but reflects a shortage of paper. "There's huge demand for baht bonds at the moment," says Mark Boyne, HSBC's Bangkok-based treasurer. "With interest rates so low, investors are desperate to get hold of securities paying any sort of decent yield at all."
Consequently, pricing for both tranches is expected to come towards the more aggressive end of the range, with for example, the three year set to price at between 5.05% and 5.25%.
Lack of choice
At FinanceAsia's recent Thailand Debt Conference, investors bemoaned a lack of choice in the domestic market and government restrictions on what they can buy. As AIA's chief investment officer Anucha Laokwansatit put it: "The regulations have to be reviewed and made more flexible. Deals with longer-term maturities should be dominated by insurance companies, but we are not allowed to buy more than 10% of any corporate issue. We are also restricted from buying at a premium in the secondary market unless we ask for special permission, which is then reviewed on a case by case basis."
Deputy Secretary-General of the government pension fund Singha NikornPun agrees. "We need products which give more depth to the market," she says. "At the moment whenever there is any news the whole market moves the same way."
Thailand's domestic bond market registered spectacular growth in 1999 and is expected to grow strongly this year as the government continues to maintain a low interest rate policy and local companies refinance more expensive foreign currency loans and bonds. Thawit Thanachana, head of investment banking at Thai Farmers Bank, told the conference that he believes Thai companies will raise about Bt200 billion this year.
In the two years prior to the crisis, he says, total outstandings in the domestic market stood at Bt52.8 billion, rising to Bt134.7 billion between January 1998 and the end of the first quarter 2000 (excluding slips and caps).
