High-yield bonds could dip next year
Issuance of debt securities offering high yields could lessen going forward because of the stricter issuance regulations and greater caution caused by previous defaults, says the Thai Bond Market Association (TBMA).
"Selling high-yield bonds to high net worth investors may be more difficult because the supervision is stricter and issuers, who are medium and small-sized companies with high investment risks, could face difficulty in debenture issuance," said Ariya Tiranaprakit, senior executive vice-president at the TBMA.
"Bond investors have higher awareness and are more selective in their investments."
The Thai bond market witnessed issuance of perpetual bonds amid the low interest rate environment. Some instances of zero-coupon bond issuance have also been detected as fixed-income mutual funds have sought ways to reduce the impact from the recent imposition of a 15% withholding tax imposed on gains.
"Investors continue searching for higher yields, but with greater caution as there is more supply in the market, especially bonds for high net worth investors," said Ms Ariya.
Perpetual bonds offer high interest rates to compensate for higher risk. If investors understand the characteristics and embedded risks attached with this type of debt securities, they can invest in perpetual bonds, she said.
Perpetual bonds, also known as hybrid bonds, have no fixed maturity date and get treated as equities rather than debts. These fundraising instruments, which carry more risk than a company's usual senior debt, are popular because they can return an average of up to 5%.
Perpetual bonds typically pay out higher distributions than plain-vanilla bonds from the same issuer to compensate investors for the higher risks involved. These include holding the perpetual securities forever and the risk that distributions might be deferred and may not accrue interest.
A zero-coupon bond is a debt security that does not pay interest but instead trades at a deep discount, rendering a profit at maturity, when the bond is redeemed for its full face value.
"The problem is some retail investors think perpetual bonds have [regular] returns from interest and resemble deposit accounts. This is incorrect and more investment knowledge has to be provided [on perpetual bond investment]," said Ms Ariya.
Misunderstanding of bond investment is among the reasons the Securities and Exchange Commission (SEC) has adjusted regulatory supervision to gravitate towards a merit-based approach from a disclosure-based method.
Previously, the SEC required bondholder representatives, bond-selling agents and sellers to high net worth investors to conduct risk assessment.
At present, financial institutions, also known as intermediaries, who sell bonds to high net worth investors must also provide evidence to prove that their customers are categorised as high net worth investors.