Less than a quarter of debentures with maturity periods due this year are corporate bonds issued by companies experiencing a slowdown, signalling the possibility of rollover difficulty and repayment postponement.
Of 660 billion baht worth of debentures set to mature this year, 55 billion are high-yield corporate bonds where issuing companies are facing rollover difficulty because of the economic slowdown, said the Thai Bond Market Association (TBMA).
These debentures are classified as unsecured corporate bonds because they are not asset-backed securities.
TBMA senior executive vice-president Ariya Tiranaprakit said 92% of the total maturity amount of debentures this year are classified as investment-grade bonds, with 8% consisting of high-yield bonds or non-rated bonds.
Around 50% of total high-yield bonds, about 27 billion baht, are those classified as unsecured bonds and the majority of investors owning them are high net worth investors, said Ms Ariya.
In the past, market regulators found that whenever bond default cases emerged, high net worth investors were vulnerable and did not have the ability to safeguard against default damages. This is in stark contrast to institutional investors, who have the ability to follow court procedures and seek damage compensation.
Although the percentage of non-investment-grade bonds is not alarming against the backdrop of sluggish economic growth, the Securities and Exchange Commission (SEC) recently issued a statement on close monitoring of the domestic debenture market and announced that a revised regulation will be issued within the first quarter to enhance investor protection.
EXTENSION REQUESTED
It is common for investors to embark on search-for-yield behaviour when interest rates remain low for an extended period. High-yield bonds, especially non-rated ones, have attracted investment flows as they offer high returns on investment.
Interest returns from debentures issued in the secondary market range from 3.9% to 7.5%, according to Finansia Syrus Securities.
But bond default could occur if the economic slowdown causes losses for issuing companies' earnings, subsequently sapping their cash flow.
No bond defaults have emerged since the case of Pace Development Corporation Plc last year, but two companies listed on the Stock Exchange of Thailand (SET) index and the Market for Alternative Investment asked bondholders to extend payment last year.
In October 2019, SET-listed Pace, the owner of gourmet grocer Dean & DeLuca, said in a statement to the SET the company was in default of 2.6 billion baht in debt owed to Siam Commercial Bank. The payment was due on Oct 17.
The announcement came weeks after Dean & DeLuca closed its flagship store in New York and as well as some outlets in Bangkok.
PP Prime Plc is among the two listed companies asking creditors for a repayment extension. The company has negotiated with financial institutions to extend the term of two promissory notes totalling 120 million baht.
The remaining promissory notes worth 60 million baht will be paid on July 31, 2020. However, financial institutions will gradually reduce the promissory notes to 40 million baht before the payment completion date, as well as further reduce promissory notes worth 80 million.
Asia Capital Group Plc also requested a payment extension period. As of Dec 9, 2019, the company reported to the SET it had completed repayment of two promissory notes worth a combined 130 million baht with interest to Global Service Center Plc.
"The market regulator is aware of the risk to bondholders, hence the rule for bond issuers to appoint representatives for debt securities distributed to high net worth investors," said Ms Ariya.
The bond representative has a duty to prevent investor damage and solve problems when a bond default arises. This regulation has been in place since 2018 following several defaults of bills of exchange (B/E) in late 2016.
B/E and unrated short-term bonds were favoured by small companies to raise funds a few years ago.
A series of bond defaults by listed and non-listed companies that issued B/E and short-term bonds in 2017 resulted in financial damage to thousands of bondholders.
B/E defaults began in December 2016 and continued through 2017. Damages were around 16 billion baht, representing 0.4% of the total outstanding value of the Thai bond market.
Under the new regulation amended to enhance investor protection by the SEC, B/E placement is limited to only 10 investors and there can be no more than 10 B/E.
If any of these 10 investors is a high net worth investor, intermediaries are required to inform investors of the product's details.