SEC warns on risk-prone debt

Investors are advised to be cautious when investing in risk-prone debt securities offering high returns, with more than half of debenture value issued by non-listed property firms, says the Securities and Exchange Commission (SEC).

Risk-prone debt securities are identified as non-rated and non-investment-grade debentures and those offered via private placement 10 (PP10). These debt instruments have whetted investment appetite by offering an average interest rate of 7%.

The securities watchdog's warning follows an increase in investment in risk-prone debt securities, whose typical investors include individuals and the elderly, said Jomkwan Kongsakul, assistant secretary-general of the SEC.

Non-rated and non-investment-grade debentures, as well as debt securities offered via PP10, have less information than debt instruments issued through public offerings, Ms Jomkwan said.

Issuances and offerings of long-term debt securities classified in the non-rated and non-investment-grade categories were valued at 54 billion baht during the first eight months, up 92% year-on-year, according to the SEC.

Some 70% of issuing companies are not listed on the Stock Exchange of Thailand, and financial information consists only of their annual budgets.

"This causes investors to have more restrictions because the financial status of these companies could change drastically, but there is no credit risk assessment for the holding period of debentures from credible credit rating agencies," Ms Jomkwan said.

Based on the SEC's observation, half of these issuing companies have experienced a decline in financial status, while more than half of the debenture value has been issued by property firms.

Issuers usually have their directors or executives as guarantors, with land plots and buildings as collateral, which are considered illiquid assets and have limitations in terms of price valuation, Ms Jomkwan said.

"Therefore, if issuers default on debt repayment, returning investment sums may depend on guarantors' debt-servicing ability or enforcement of collateral, which is illiquid," she said.