A few years ago, Thailand was not popular with foreign derivatives bankers. As the Thai baht went through a period of increasing volatility, regulators became more and more restrictive on the sale of derivatives, telling banks to submit lists of products they want to sell for approval. “At the time it was very annoying: I thought it was too draconian,” says one banker.

But Thailand’s stringency on derivatives paid off when markets turned really nasty. “In the two years or so before the global financial crisis, every new structure you wanted to bring out, you had to take it to the regulators to get an approval done for the product,” recalls Adam Gilmour, managing director and co-head of corporate sales and structuring for Asia at Citi. “That meant that by the end of 2008, when the crisis was at full steam, they had good practices in place: solid documentation, no speculation, and robust product risk they could feel comfortable about. It put them in very good stead for the crisis.”

The Bank of Thailand recognises derivatives are important for its companies – particularly with such a volatile currency – and so despite its stringency it has been gradually relaxing laws, most recently in August. The box in this article gives more details but in essence it widens the ability of companies, institutional investors and individuals to enter derivative contracts linked to foreign variables, be they indices, currencies or rates.

Thai derivative volumes are not large. Bank of Thailand data shows that in September 2009, total outstanding Thai baht interest rate swaps at Thai commercial banks came to Bt2,231 billion, or US$67 billion [CHRIS: THIS IS SOURCED FOM BOT DATA – DOES THE FIGURE SOUND HIGH TO YOU?]. While that sounds a lot, the Triennial Central Bank Survey, which compiles data on derivatives and forex from the world’s central banks, gives an indication of how Thailand really compares on a world scale: in its last published survey, in 2007, total average daily turnover of OTC derivatives market activity – including foreign exchange and interest rate – was US$5 billion, compared to US$210 billion for Singapore. Similarly Thailand’s reported foreign exchange market turnover – in total, not just derivatives – was US$6 billion, or 0.2% of the world’s total; Singapore’s was US$231 billion. One foreign banker puts it like this: “If I cut the universe [of Asian markets] into a top and a bottom half, Thailand would be in the bottom half, but near the top of it.”

Nevertheless, Thai officials consider themselves accommodative to derivatives, within reason. The Bank of Thailand describes its policy on derivatives to Asia Risk as “to accommodate development in order to make available as many risk management tools as possible, while ensuring financial system stability and financial institutions’ soundness. In other words, the challenge is to strike a balance between the flexible environment to foster innovation and maintain system stability.”

The bank says it is guided by five principles in formulating the supervisory framework for derivatives business: efficient risk management, appropriate to the nature and complexity of the business; financial and economic stability; sufficient customer protection; relevant prudential regulations being in place; and sufficient information for supervisory purposes. It also claims have put “considerable effort and resources” into education, human resource development, accounting standards and the resolution of tax issues.

Those in Thailand who watch the market closely consider the Bank of Thailand accommodating without necessarily being enthusiastic. “It’s a small market from an international perspective,” says Komkrit Kietduriyakul, partner at Baker & McKenzie in Bangkok. “But the Bank of Thailand has tried to support it –  they understand derivatives and believe they can be useful.”

Others find it can be bureaucratic, but works. “I’m very positive about Thailand,” says a foreign banker in Singapore. “There is plenty of bureaucracy, and it takes a long time if you want to do a new structure – getting it approved can take months. But it’s a lot better than a lot of other markets like Indonesia, where the industry shut down completely with the financial crisis.” He adds: “If I develop a new product, there’s a mechanism to take it to the Bank of Thailand and to be able to get it approved. They might be a little bit tight on the documentary restrictions, but there is a clear path.”

Most things a corporate would need to do, they already can. “As long as it is a hedging transaction, it’s basically OK for corporates,” says Komkrit. “What they don’t want to see is speculation by corporates, and the most sensitive issue is the Thai baht position for non-residents. Their experience in the last crisis [the Asian financial crisis] means they don’t want non-residents manipulating the baht.”

One could argue that the volatility in the baht makes it particularly essential for Thai companies to have access to derivatives since the penalty for not hedging a currency exposure can be severe. In particular, Thai exporters and importers are heavily exposed to the US dollar. The Bank of Thailand acknowledges that Thailand’s managed floating exchange rate and the global financial crisis “has led to more volatile exchange rates in the emerging market countries, including Thailand” and says that “hedging exchange rate risk is a necessity for Thai companies to protect themselves against volatility of exchange rates.” The Bank reckons it has “continuously encouraged” the business sector to hedge exchange rates, and hosts numerous seminars to help small and medium enterprises understand why and how. It also publishes an SME risk management manual. In any event, it says the recent relaxations have made it easier for companies to hedge, and to use foreign currency accounts.

What next? In November the Bank of Thailand issued its Financial Sector Master Plan Phase II, which covers a host of issues around the Thai financial system. Although the public announcements about the plan don’t mention it, people close to it say that it pledges to support the development of credit derivative transactions, as well as continuing to encourage interest rate derivatives and urging participants to use ISDA market agreements (which, in practice, they generally do anyway). “I think credit derivatives will become more popular in the Bangkok market,” says Komkrit.

For the Bank of Thailand’s part, it’s open to the idea of further openness. “We are supportive of the liberalization of the derivative regulation in Thailand, as long as the stability of our system is maintained,” says the Bank. But further change seems unlikely in the short term: “The current regulatory environment seems to be appropriate to accommodate the current level of market development and provide enough hedging instruments for our exporters and importers.” In other words, for now, it’s as open as they feel it needs to be.

Box: The August liberalization

On August 5 Suchada Kirakul, assistant governor in the financial markets operations group of the Bank of Thailand, announced a series of liberalization measures. Most were about investment in securities abroad, but they also had a significant impact on the derivatives market.

The changes were:

• Thai institutional investors – including companies with assets of at least Bt5 billion – are permitted to invest in securities abroad and undertake a range of derivative activities with onshore or offshore counterparties. These include derivatives linked to foreign variables such as exchange rates, interest rates, prices of debt securities, equity securities, commodities, and various indices. Transactions can be for hedging or yield enhancement, although derivatives related to baht exchange rates can only be for hedging. These transactions can cover up to US$50 million without the Bank of Thailand’s prior approval.
• Thai companies are given more flexibility in derivative transactions with domestic commercial banks to hedge their forex exposure. The BOT gives the example of hedging based on one-year forecasts of revenues or obligations relating to goods and services.
• Thai residents are allowed to invest in derivatives, structured notes and structured deposits linked to some foreign variables – such as indices – for yield enhancement and to hedge their investments in securities abroad.

What’s the impact? The Bank of Thailand tells Asia Risk: “The relaxation has provided alternative investment channels for the institutional investors so that they can further diversify their investment and enhance their investment returns through derivatives.” It has also helped institutional investors with their risk management by allowing them to hedge risks such as commodity prices and interest rates more flexibly and cheaply, the bank says. “Additionally, the relaxation has added more flexibility in foreign exchange risk management of Thai exporters and importers, enabling them to hedge their foreign exchange exposure more efficiently.”

At the individual level, residents have a greater range of investment products, while it also gives domestic commercial banks a chance to offer structured products to a much wider customer base than before. “More structured notes and deposits traded in the market could possibly help reduce transaction costs and add more investment products to the domestic market.”

December 2009

The Thai baht debt capital markets have enjoyed a year so vibrant it’s as if the global financial crisis never happened. According to ThomsonReuters data, by November 19, Bt304.36 billion had been raised in local currency bonds in Thailand in 2009 over and above government issuance – well up on Bt198.31 billion for the whole of 2008 and Bt182.73 billion for 2007.

“2009 has been beyond everybody’s expectations,” says Surabhan Purnagupta, head of investment banking at Bangkok Bank.

Why the increase? Part of the reason is a peculiarity of the Thai market: the power of the retail investor base. “Retail buyers have become very important players in the market,” says Surabhan. “They are seeking alternative investments to their deposits, as the bank deposit rate has become very low.  They’re becoming more and more familiar with corporate debentures.” Bank deposit rates plunged as the Bank of Thailand cut policy rates through 2008 and 2009, from 3.75% in mid-2008 to 1.25% by May this year, and although economists have started to project modest rate rises in early 2010, investors have spent much of 2009 looking for a better return than the 1.5% they can typically get for a two-year deposit with banks today. Contrast this with the 3.2% offered on the three-year bonds sold by PTT, the country’s darling credit, in April; or the 3.5% on two-year paper from Toyota Leasing Thailand, which is rated AAA, in February (although rates were still declining at that stage and had not bottomed). Corporate debentures have particular appeal since government yields on short dated bonds have fallen hard too, paying as little as bank deposits.

This marks a shift in the investor landscape. “It has changed a little bit,” says Thiti Tanthikulanan, capital market business head at Kasikorn bank. “In 2007 and 2008 it was mainly financial institutions who subscribed for bonds. This year it has been retail investors.  This year the credit spreads have been quite volatile, very wide at the beginning of the year but narrowing quite quickly as the year went on. So demand from financial institutions has been diverse and uneven.” Retail, needing the yield, has more than compensated.

Retail is easy to reach in Thailand: now that customers are familiar with the corporate debenture product, they buy the bonds in their local branches. On the day IFR Asia calls Bangkok Bank, it is the first day for subscriptions for a new issue of up to Bt8.4 billion in senior debentures for Charoen Pokphand Foods, for which Bangkok Bank is an underwriter. “Retail investors can just go to their bank branch and subscribe,” says Surabhan. This is one reason the primary market is vibrant but the secondary market lacks liquidity. “The people who invest in corporate bonds normally tend to hold them until maturity.” He reckons retail represents more than half of the market, and has been involved in some deals, such as the Bt12 billion multi-tranche issue for Skytrain operator Bangkok Mass Transit System in July, in which retail made up more than 80% of the deal.

This is also a reason that domestic bonds in Thailand tend to have a large number of lead arrangers – it increases the ability to reach as many retail investors on the ground across Thailand. PTT’s Bt35 billion issue in July, for example, credits 11 bookrunners – not just local leaders like Bangkok Bank, Siam Commercial Bank, Krung Thai Bank, Kasikornbank, Siam City Bank, TMB Bank and Bank of Ayudhya, but dedicated securities houses Thanachart Securities and TISCO Securities, and foreign-owned houses Standard Chartered Bank (Thailand) and CIMB Thai Bank. The sense is of using every possible avenue to reach the ordinary investor.

One also sees the retail influence in deal structure. Many of the biggest deals this year have come with multiple maturities. The Bangkok Mass Transit System issue, although it uncharacteristically had only two bookrunners in Bangkok Bank and Standard Chartered, came with five separate maturities – three, four, five, six and seven years. This was partly a retail strategy. “Normally in the market people say that if you issue three and four year tranches for sale at the same time, they cannibalise each other,” says Surabhan. “I didn’t believe that, and so we went out with three to seven year bullets and it proved successful. If you are retail and you want five years you take five, if you want seven you take seven; but if you want an amortising nature, you buy the three, the four and the five tranches at the same time, or all of them.” The strategy proved sufficiently successful to upsize the deal to Bt12 billion from Bt10 billion; not bad for a company emerging from restructuring and seeking to pay off hefty floating rate debt. “It was two times oversubscribed for a company that was only recently out of rehabilitation,” says Peng-Meng Ling, managing director and regional head of capital markets for southeast Asia at Standard Chartered. “It was a classic case of putting in the hard work in educating investors: after they learned to appreciate the credit they were willing to come back and invest in this paper.”

Some issuers have taken greater advantage than others in this environment, but none more so than the PTT group. In February the parent, PTT, issued Bt15 billion of eight-year paper. Another arm of the company, PTT Aromatics & Refining, raised the same amount in April, this time at five years. Then came PTT Exploration and Production in May, which raised Bt40 billion in the country’s biggest single deal of the year, in four tranches, at three, four, five and 10 year durations. So, seeing the attitude, the parent came back again: PTT raised Bt35 billion in July at three, seven and 10 years. In total, that’s Bt105 billion group-wide in five months – and more than one third of the national total for the whole year to date.

Unsurprisingly bankers consider the PTT deals the most significant of the year, “just because of the size of it,” says Thiti. “It wasn’t hard to do, because the name is so good and because at the time interest rates were quite low with not much prospect of recovery. So the bond was a very good alternative investment for financial institutions and retail investors.”

For issuers of PTT’s cachet, there is liquidity up to 10 years and beyond, though the bulk of corporate debentures come in the three to six year range. For lower-rated or less well-known issuers, access is tougher, though there have been signs this year of interest in names below the top tier. CH Karnchang is rated BBB+, and sold a Bt2.5 billion issue of three and five year paper earlier this year at rates that don’t seem excessive on a world scale: step-up rates from 5.3% to 6.3%.

One surprising thing about the success of corporate deals is that they have also had to compete with a sale of government savings bonds by the Ministry of Finance, that took Bt80 billion out of the market in mid July in a deal so popular it was fully subscribed within hours and upsized from its original Bt50 billion; and a Bt130.7 billion retail savings bond raising by Bank of Thailand in September, more than doubled from its original target, which attracted 60,000 retail investors. The Ministry of Finance may well be back again before the end of this year. 

Bank issues have been less noticeable, although they have been present: Krung Thai Bank raised Bt20 billion in February, and Kasikornbank Bt 600 million in a lower tier two issue. At the time of writing Thanachart Capital, a holding company for Thanachart Bank among other things, was due to launch a Bt10 billion five-year issue, and KrungThai Card, Thailand’s largest card issuer, was finalising a four and five-year raising. Other bond issues in the works at the time of writing were ThaiCom, formerly known as Shin Satellite; and Toyota Leasing (Thailand), a regular issuer in baht. One puzzling trait, though, is that the Bank of Thailand is believed to have refused approval for a number of foreign issuers in baht in recent months, although market participants seem to expect these approvals to be granted in 2010.

Quite apart from retail demand, there are other reasons it makes sense for companies to issue debt. “Most are trying to lock into the yield curve, with the risk of the BOT’s policy rate being either flat or rising in the coming months ahead,” says Somphan Eamrungroj at Export-Import Bank of Thailand. “Personally, [I feel] the yield curve has risen during the last two months too fast so may incur some corrections in the weeks ahead. The BOT has been passively trying to keep the policy rate stable amid their FX interventions to stem the strengthening of the baht, causing them to absorb the surplus baht out of the system.” Still, he says Thai Exim is “watching the market closely as we have some refinancing needs emerging in 2010.”

Additionally, the threat of the global financial crisis added an incentive for issuers to raise funds when they could. “At the end of 2008, a lot of corporates were concerned about the liquidity in the system and whether banks would still lend money,” says Thiti. “They saw what was happening in the US, where banks weren’t lending, and were afraid if that might happen in the Thai banking system as well. So corporates issued bonds to make sure they had liquidity going into 2009.” Then, with interest rates dropping through the first quarter, the attraction grew.

Has the surge run its course? “The pipeline is looking a bit thin at the moment,” says Thiti. “People who wanted to issue have already done so. Going into 2010 we think the volume will not be as large as in 2009.”

Still, the long term looks promising, and is attracting foreign banks despite the political uncertainty. CIMB pushed into Thailand when it became the largest shareholder in Bank Thai in 2008, rebranding it CIMB Thai Bank in May 2009. “The recently announced master plan [launched by the Bank of Thailand in November to cover the development of the financial sector over the next five years] placed a lot of emphasis on the bond market,” says Thomas Meow, head of debt capital markets for CIMB overall in Kuala Lumpur. “We believe there are a lot of opportunities there.”

Just as Thailand has entered a period of rare political calm and optimism with a new prime minister, one of its most sickly banks has also been given a new lease of life with a landmark recapitalisation. But, just as the jury is out on whether Thailand’s government can build on its new foundation, it remains to be seen whether TMB Bank can turn the corner after years of underperformance.

TMB Bank was created in September 2004 from the merger of Thai Military Bank, DBS Thai Danu Bank and Industrial Finance Corporation. The merger created the (then) fifth largest bank in Thailand, and today has 471 branches and five million deposit accounts, but has struggled to generate performance to tally with its scale. It recorded a full year loss of Bt 43.7 billion in 2007, three and a half times worse than the previous year, and has non-performing loans equivalent to 15% of lending as of the start of the year, having set aside Bt31 billion in provisions last year for loan-loss reserve requirements and increasing bad debt.

In January, though, it completed a US$1.1 billion recapitalisation which gives it a chance to turn things around – this time thanks to the heady enthusiasm for Asian distribution platforms at ING, which took on 13.1 billion shares out of the 25 billion issued in the deal, taking it to a 30% stake (and 25% of the voting rights). The recap, advised on by Macquarie Securities, UBS and Phatra Securities, was something of an event in its own right: southeast Asia’s largest equity fund raising in the last 12 months and the second biggest since 2002, achieved in the teeth of the sub-prime crisis. And from TMB’s perspective, it considerably improves capital adequacy ratios and frees funds for investment.

TMB and its legacy businesses have long been stuck in the murk. Departing DBS chief executive Jackson Tai recently recounted to Euromoney the shocking state of Thai Danu when his predecessors at DBS agreed to take it over in 1999; it was so bad that it caused DBS to report a 13% NPL ratio at a group level – not just the Thai business – in 2000. Things haven’t greatly improved since and there is still debate about whether the 2004 merger made any sense anyway. (Among the dissenters is recently departed TMB chairman Somchainuk Engtrakul, who tells Euromoney: “I think it was not right. If you leave TMB alone in 2004, I think it would be in a much better condition [now].”) Somchainuk resigned after the recapitalisation, “because I have completed my role; it is time for me to hand the stock over to ING to carry on.” Chief executive Subhak Siwaraksa is expected to follow.

So what’s the appeal for ING of such an asset? Philippe Damas, CEO of ING Private Banking and of retail banking for Asia, puts it in the context of a broader strategy to build a distribution network in Asia.  From this perspective, TMB’s branch network looks appealing. “It’s a very nice imprint,” says Damas. “Obviously we also look at the current state, and we feel we have the experience to solve their problems.” Priorities at first will be governance, with wholesale changes at the board level and in management; improving the execution and systems for risk management; improving profitability, by driving revenues rather than cutting costs (“if you look at the net interest margin it’s pretty clear they’re at the bottom of comparable banks in Thailand”); and by increasing non-interest income, which fits in with ING’s broader expertise in insurance and asset management. ING will second between 15 and 25 people into the bank.

ING believes its experience in other Asian assets, notably ING Vysya Bank in India and Bank of Beijing in China, will set it in good stead. But rebuilding TMB will potentially be even more complicated than that.

For a start, there’s the fact that the Ministry of Finance, though slightly diluted in the rights issue, still holds 26% of the stock – less than ING, but more of the voting rights. Somchainuk says this level of ownership was never an issue under his watch. “The Ministry doesn’t involve itself in the day-to-day operation of the bank at all,” he says. “They have three representatives in the directors but they leave everything with the board and management. They are quite professional in this area.” But it still makes rebuilding the bank politically sensitive, particularly since the team now in the ministry under the new government is not the same as the one who handled negotiations for the deal. Damas thinks the ministry is so keen for success it will remain friendly; “they have been called to recapitalise this company a couple of times already, so this will be the last time they want to do so. As long as we can demonstrate we bring something and can manage the company, I think they will remain a very silent partner.”

Another issue to resolve is DBS, who held a 16% stake in TMB through their pre-merger stake in Thai Danu. DBS declined to participate in the rights issue in January, and so ended up diluted to around a 7% stake. As Tai explained in November: “We decided early on that we could not go ahead with the recapitalisation unless we saw that we could really take serious control over the future of the bank. We felt that 16% was never-never land in terms of equity accounting or consolidation.” When it became clear it couldn’t do that, Tai declined to take part in the deal, and instead launched a rival bid, including Deutsche Bank, which was not selected. Tai says DBS “will be good shareholders and see what comes ahead in the future”, but that will now be a matter for DBS’s new chief executive, Richard Stanley. ING would be a willing buyer but in the meantime the overhang is hurting the stock.

Much depends on the outlook for Thailand itself. An election on December 23 ended 15 months of limbo after a military coup deposed Thaksin Shinawatra in 2006; Samak Sundaravej, representing a new party that looks an awful lot like Thaksin’s old one, is the new prime minister. “The money has started circulating and the outlook for Thailand will be a lot better in the coming year,” says Somchainuk. “The economy will have a much better stance.” Logically, that means stronger businesses, and less pressure on NPLs; and perhaps a brighter future for a beleaguered bank.