Bill of exchange (B/E) defaults are expected to continue in the near future as investors' risk-averse mood after five listed companies failed to redeem their short-term debt instrument could cause a rollover failure of other issuers who do not prepare cash flows for redemption, a source at the capital market warns.
B/E issuers should seek overdraft loans from financial institutions or other financial sources in case the debt instrument's holders refuse to roll over as confidence in small companies has been eroded by the recent defaults of unrated B/Es, the source said.
The source, however, said impact should be limited in the worst-case scenario that more B/E issuers miss payment as the unrated debt instruments are sold to only accredited investors.
B/Es issued by financial institutions are not expected to default as their financial positions are solid and they are strictly supervised by the Bank of Thailand, the source said.
"In the future, mutual fund companies on behalf of financial intermediaries should cautiously analyse debt instruments to prevent repeating the default problem and to build up investors' confidence," the source said.
Four SET-listed companies and one MAI-listed firm have failed to redeem B/Es on their assigned dates since October. They are Nation Multimedia Group Plc (NMG), KC Property Plc (KC), Inter Far East Energy Corporation Plc (IFEC), E For L Aim Plc (EFORL) and Rich Asia Corporation Plc (RICH).
But NMG has already serviced 50 million baht in debt from B/Es to Asset Plus Fund Management, while EFORL paid 200 million baht and IFEC paid the first batch of its 200 million baht in defaulted B/Es, even as another lot of 200 million baht in B/Es went into default two weeks ago. IFEC contends that conflicts between major shareholders caused the B/E defaults.
In a meantime, Chajchai Sarit-Apirak, first senior vice-president of Kasikorn Asset Management, said investors should not panic about the recent B/E defaults and they should learn about risks associated with the unrated debt instruments.
Debt instrument's risks are associated with changing in price due to change in interest and hopes on returns, and default risks.
Default risks can arise in unrated, non-investment grade or even investment grade debt instruments, he said, adding that the possibility of debt instruments with good credit ratings to default is lower than those with lower and non-investment grade, but their returns are also smaller.
"For defaults of several companies recently, their issuers have engaged in different businesses so that could not tell which industry sectors were in financial difficulty. Defaults may results from a small mistakes including mismanagement of cash flows in short term and problems in internal management," he said.
Mr Chajchai said asset management companies must analyse both macro and micro economies for investment in corporate bonds, such as commercial banks' loan extension, and they need to follow up operating performance of the debt instrument issuers regularly.