Finance Minister Apisak Tantivorawong has asked the Securities and Exchange Commission (SEC) to regulate mutual fund companies investing in unrated bills of exchange (B/Es) after a series of defaults involving the debt instruments.
Apisak: No threat to financial system
Although only institutional and high-net-worth investors are eligible to invest in unrated bonds and B/Es -- and they are considered capable of evaluating risks -- any losses incurred by their investments affect retail investors who hold their funds' units, Mr Apisak said.
But he rushed to soothe market jitters, saying the recent B/E defaults would not be harmful to the country's financial system, as the size of the payment failures was minimal and the defaults resulted from those companies' problems, not issues with the economy.
Three SET-listed companies and one MAI-listed firm have failed to redeem their B/Es on the assigned dates since October. They are Nation Multimedia Group Plc (NMG), KC Property Plc, Inter Far East Energy Corporation Plc (IFEC) and E For L Aim Plc (EFORL).
NMG, however, has already serviced 50 million baht debt from B/Es, while EFORL paid 200 million and IFEC paid the first batch of its 200-million-baht defaulted B/Es while another lot of 200 million baht in B/Es just went into default last week.
Amid the prolonged low-interest-rate environment, yield-hungry investors have hunted for higher returns. According to data from the Thai Bond Market Association, B/Es issued by the business sector have reached 262 billion baht, of which 221 billion will be due by September 2017, including 151 billion in rated B/Es.
Mr Apisak said that the debt defaults, while not sizeable, have created financial difficulties for investors and that investment asset companies should consider whether they are performing their duties well enough.
The SEC allows institutional investors to invest in unrated B/Es, reckoning that they have the knowledge and wherewithal to assess risks, the finance minister said.
Deputy Prime Minister Somkid Jatusripitak said he has instructed the Finance Ministry and the SEC to consider whether the current regulations for investment in unrated B/Es are effective enough and to check how much mutual fund companies have invested in such debt instruments.
SEC secretary general Rapee Sucharitakul said in a written statement yesterday that defaulted debt instruments issued by both listed and non-listed companies represent a mere 0.03% of the debt instruments outstanding of 3.58 trillion baht over the past 12 months and that defaults occurred only in unrated B/Es.
"Each default is a particular case," he said. "Some defaults stemmed from conflicts of executives, and others resulted from inefficient cash flow management."
Defaults in unrated B/Es amount to 368 million baht so far, accounting for 0.34% of net asset value in funds whose policy is to invest in unrated debt instruments, so a snowball effect is not expected, Mr Rapee said.
The SEC, however, has instructed mutual fund companies to state in the literature of funds with a policy of investing in unrated debt instruments that they are mutual funds for institutional and non-retail investors. Their documents for sales must also contain the risk description.
Moreover, these mutual fund companies must set up a working system starting from the inception process, communicate with financial intermediaries and follow up performance to ensure that risks are in line with the target group's expectations.
The SEC has requested that unrated debt instrument issuers assess their financial position and seek other financial sources in preparation for the chance that they fail to roll over such debt instruments, Mr Rapee said.
For the financial intermediaries, the SEC has asked them to explain the details of such products and related risks, and they must let investors sign their names to confirm that they acknowledge such risks.
Santi Kiranand, a senior vice-president of the Stock Exchange of Thailand, said B/Es are short-term debt instruments with a maturity of up to 270 days and should be launched to increase liquidity rather than to raise funds.
He warned investors to be cautious about investing in debt instruments, as interest rates are reversing into an upward trend.
Thiti Tantikulanan, head of Kasikornbank's capital markets business division, said B/Es outstanding at the end of 2016 amounted to 260 billion baht, with 40-50% of them due this month and next.
B/Es were issued in significant amounts last year in keeping with strong demand from investors' search for yields amid low interest rates.
"On average, B/E return is in a range of 3.5-6% a year, compared with a coupon rate of investment-grade corporate bonds of 3-3.5% for a 10-year maturity," Mr Thiti said. "This reflects the higher risk of B/Es."
Kasikornbank also underwrites B/Es for corporate customers under a strong analysis of clients who largely have a strong relationship with the bank and use several funding sources of the bank.
Mr Thiti said the bank's loan approvals use tough criteria and analysis.
Payong Srivanich, president of Krungthai Bank, said B/Es should not be a financial instrument for fund mobilisation, as they do not require issuers to be transparent with information.