Debt sale to retail investors approved

Debt sale to retail investors approved

SEC eases rule on tier-2 subordinated notes

The Securities and Exchange Commission (SEC) has given the green light for banks to offer their tier-2 subordinated debt to retail investors.

The approval is intended to help absorb the massive supply from the rollover of billions of baht worth of these securities scheduled to start this year.

To mitigate risk for retail investors in putting money into the Basel III-compliant tier-2 subordinated notes, conditions of conversion to equities and setting a minimum conversion price are a must.

The SEC will also allow mutual funds excluding money market funds to invest in banks' tier-2 notes with the aim of providing more investment choices, secretary-general Vorapol Socatiyanurak said.

He said the relaxation was expected to take effect by the fourth quarter.

The easing comes after banks asked the SEC to increase the number of potential subscribers for their tier-2 subordinated notes, as now only institutional and high-net-worth investors can buy the hybrid securities.

Thai banks hold 341 billion baht worth of outstanding subordinated notes, with 56 billion worth callable this year.

The highest amount of Basel III-compliant tier-2 subordinated securities is 125 billion baht, maturing in 2022.

Year-to-date, four banks have issued tier-2 subordinated notes. Tisco Bank sold 2.4 billion baht worth, Thanachart Bank earmarked 13 billion baht, Krungthai Bank sold US$700 million in 10.5-year bonds in May at 5.25%, and CIMB Thai Bank issued 400 million ringgit (4 billion baht) worth.

"The Basel III additional tier 2 instruments’ complexity and associated risks are different from those of plain debt securities, as the holders will be forced to convert them into common shares if the banks face financial problems. As a result, the floor conversion price has been standardised to reduce complexity and enable investors to learn of the highest exposure," said Mr Vorapol.

"In addition, banks will be able to determine the number of shares for conversion prior to the offering of instruments so they can provide investors with sufficient information. Moreover, intermediaries and sales agents must apply procedures for selling high-risk securities such as a suitability test, key information disclosure and warnings of the securities’ high risks or complexity."

The floor conversion price of Basel III additional tier-2 instruments has been set at half the commercial banks’ common stock prices during the offering period.

The standard for minimum exercise price will also be applicable to Basel III additional tier-1 instruments.

The SEC, the Bank of Thailand and commercial banks are working to outline the level of banks' financial positions, which could trigger conversion of the tier-2 securities to common shares.

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