Bonds Rally


Economic News

22 Jul 2010
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The Thai bond market is seeing a flurry of new offers as companies seek to raise new capital, while at the same time central bank issues are experiencing increased demand on the expectation of lower interest rates.

On November 11, PTT Chemical (PTTCH), a key petrochemicals firm that is a subsidiary of leading energy company PTT, announced that it was setting coupons for a forthcoming $285m bond issue. The move is part of a plan to raise $430m to finance expansion.

PTTCH will be offering a coupon (interest rate paid by the issuer to the holder) of 5.3% in the first three years and 6% in the last two years of its five-year bonds. The seven-year bonds will bear the same coupons for the first five years, before increasing to 6.45% in the sixth and seventh years. The bonds, which are due to be issued between December 1 and 3, are rated A+ by Fitch Ratings. Confidence in the float is clear, as it has been underwritten by several major banks, including Kasikornbank, Bangkok Bank and Siam Commercial.

PTTCH's issue is one of a series expected over the coming months. Later in November, the Bank of Ayudhya, Thailand's fifth-largest lender, of which General Electric (GE) owns a third, is expected to launch bonds worth $570m in its third bond floatation of the year. Ayudhya's most recent issue, in May, offered a coupon of 4.25% on two years and 4.5% on three-year bonds.

Several other issues are expected this month, including a $115m offer from Thanachart Capital, a holding firm largely involved in financial services; a $40m launch from Khon Kaen Sugar Industry; and a $14m offer from Thai Union Frozen, a tuna exporter.

Additionally, by the end of the year, coalmining firm Banpu should issue three-year bonds worth $140m to fund debt refinancing, while state-owned Export-Import Bank will also launch a $140m offer in order to expand its lending business.

The recent surge in issues represents the strengthening of a long-term trend.

"The domestic bond market has gradually been developing over the past decade as major local companies have refinanced all funding through local bond issues," Vorapak Tanyawong, president of J.P. Morgan (Thailand), told OBG. "Therefore, the capital market has been greatly expanding through the corporate bond market and government bond market."

While a range of private issues comes onto the market, demand for public Thai bonds has soared in recent weeks in expectation of a cut in interest rates.

The Bank of Thailand (BoT) is widely expected to bring rates down by at least 25 basis points to 3.50% at its meeting on December 3. Even a cut of 50 basis points is far from out of the question, given the global credit crunch and the authorities' wish to keep the economy moving forward despite a global slowdown. Some even claim that an emergency cut in November is possible, though this seems unlikely.

On November 12, BoT Deputy Governor Bandid Nijathaworn indicated that a rate cut was seen as necessary, given easing inflationary pressures and the risks presented by an economic slowdown. Recent weeks have seen the price of oil drop dramatically, while the cost of food and commodities has also decreased - both contributing to falling inflation.

"Bonds have rallied to where I can't imagine. Today the long-end yields seem to be holding stable, but the auction results this morning were very upbeat," an unnamed bond dealer told the international press.

Yields on one-year, 15-day and 28-day central bank debt have fallen significantly in recent days. Additionally, the secondary market has seen yields narrowing - the ten-year bond yield fell to 3.88% on November 4, a ten-year low, while the one-year bond yield fell to a six-month low of 3.33%.

The rally of bond markets, both public and private, is indicative of renewed confidence in the future of the Thai economy, after some difficult months in which growth expectations had been trimmed, and despite the tightening of conventional bank lending. If yields continue to tighten in the medium term, it could be a strong sign that Thailand has weathered the worst of the credit crunch.

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