The Thai government will formally announce today or tomorrow that it has appointed a group of four banks to lead the Bt24 billion ($600 million) securitization deal that will finance the construction of a new government office complex.
The four - Bangkok Bank, Government Savings Bank, HSBC and TMB - beat out a field of over 60 other banks who were also bidding for the transaction. The three other main bidding consortia were: Deutsche Bank and Bank Thai; Standard Chartered with Kasikorn, Krung Thai and Siam Commercial Bank; and Citigroup on its own.
According to those who were beaten and to some earlier press reports, the mandate was secured on the back of a firm underwriting proposal that the consortium had offered in its bid. However, sources close to the deal reject that notion, saying that no formal underwriting has been given as the terms of the deal had not been decided.
The source claims that in the terms of reference given out by the government, there is a suggested structure that the government is looking to achieve with prospective deal sizes, numbers of tranches, pricing and tenor. However these terms are just for reference and no commitment has been made on those terms, except to say that if those terms were to go ahead, then the consortium would abide by them.
"This is not a bought deal," says the source. "But we will look to secure the Bt24 billion under the market circumstances." The issue is clearly sensitive.
The deal is huge by any standards and is groundbreaking by the standards of Thailand's domestic market. The funds will be used to build and re-house a government office complex on the Chaeng Wattana road in Bangkok. Into this building, some 28 separate government and civil service agencies will move, vacating private sector offices that they have been leasing out for decades.
That this new project is being financed by securitization is a sign that the government wants to build new infrastructure but does not want to add burdens to its already stretched budget and credit standing.
The deal will see a special purpose vehicle (SPV) owned by the Ministry of Finance's 100% owned Dhanarak Asset Development issue bonds, which are backed by the leases that all the government agencies will sign. In this respect the deal thus looks like little more than straight government credit, albeit packaged a different way.
However, the proceeds of the bonds will be used to actually build the complex, and so bond holders will face some completion and construction risks. Sources suggest that the lease agreements will have to be structured so as to ensure that the government agencies still pay, whether the buildings are built or not.
Also to be decide are the terms of the bonds. Generally, the shorter the tenor of the bonds, the less spread the government will have to pay over its own benchmark rate. However, the shorter the bond, the quicker the amortization schedule and so the greater the pressure on the lease repayments that the government will have to make in its early years.
Yet in terms of pricing, if the government did decide to go out to 15 years, it could look at a recent Egat bond with a similar tenor and see that that quasi government credit only had to pay 39bps over treasuries to secure its debt, a level about which the government can feel fairly sanguine.
Other issues that need to be decided are legal representation, rating agencies and trustees, who will all need to be appointed before an expected second half launch. It is likely that the bonds will be issued in three separate lots, the first this year, then in 2006 and 2007. The complex itself will be completed by 2008.
The government wants heavy retail involvement in the deal, hence all the consortia are made up of international securitization know how and local distribution skills. The choice of HSBC can be linked directly to that bank's role in the Hong Kong government securitization exercise last year that was well-placed with retail investors.
A lot is riding on the deal as it the first time that the government has undertaken a securitization and it is looking to use the technique repeatedly in its Bt1.5 trillion infrastructure spending campaign. Securitization will allow private sector and off budget finance to be used to further the government's spending plans.
Other governments have used securitization in the past, but usually of existing assets whose revenues are fairly transparent. This will be something of a first, as the assets being securitized do not actually exist yet. Private sector future flow deals are common, but not public sector deals.
The deal will also be a test of Thailand's domestic capital markets, which have never really quite returned to the levels of depth and liquidity that they enjoyed before the crisis. It will be a good indication of how much of the money needed in the government's infrastructure plan can be raised onshore and how much will have to come from offshore sources.
Key to this happening will be that the government and Ministry of Finance allow the deal to be sold in a market driven way, with pricing determined by a book build and not by a previously set target. In this way, the deal will in no way be seen as artificial and the transparency will help all future deals.
