Inside the struggle to raise fresh funding
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Inside the struggle to raise fresh funding

A string of debt defaults has the market on edge, but with tighter lending criteria, some companies don't have many options

According to the Thai Bond Market Association, seven companies missed payment schedules for 23 tranches of bonds in total this year as of Aug 31, worth more than 19 billion baht.
According to the Thai Bond Market Association, seven companies missed payment schedules for 23 tranches of bonds in total this year as of Aug 31, worth more than 19 billion baht.

The protracted pandemic left a profound impact on businesses across Thailand. Although the financial performance of many Thai companies has improved as the outbreak eased considerably, a number are still struggling to mobilise fresh funding for business expansion and to repay debts.

For listed companies, there are three methods for fund mobilisation: seeking bank loans, raising registered capital and issuing debentures.

However, bank loans have become tougher to obtain recently as banks tighten their loan criteria amid an increase in non-performing loans and household debt.

What led to this funding crisis?

For companies that aggressively expanded in recent years, liquidity can dry up and mobilising fresh funds is much more difficult. Securing adequate funding to meet debt obligations could become an issue for some companies.

JKN Global Group informed the Stock Exchange of Thailand (SET) last week that it could not fully pay a tranche of bonds worth roughly 607 million baht due on Sept 1.

The owner of the Miss Universe Organization blamed a "liquidity mismatch" for the "bond payment rescheduling". The SET-listed content distributor and media buying company said it remains committed to making six more bond interest payments due later this year.

In total, JKN issued seven tranches of bonds worth 3.36 billion baht with maturity dates in 2024 and 2025.

Two other companies also missed payment dates for their debentures earlier in the year. Stark Corporation missed payment on five tranches of bonds worth nearly 9.2 billion baht, while All Inspire Development missed payment on seven tranches of bonds worth 2.33 billion baht.

According to the Thai Bond Market Association (ThaiBMA), seven companies missed payment schedules for 23 tranches of bonds in total this year as of Aug 31, worth more than 19 billion baht. The other companies are Asia Capital Group, Apex Development (APEX), Inter Far East Energy Corporation (IFEC), and Destination Resorts.

What are the ramifications of the funding problem?

Companies with sound financial capacity and a good credit rating should have no difficulty in securing funds to repay debentures. One popular method is rolling the debt over by issuing a new tranche of debentures to raise fresh funding for the redemption of previous bonds.

However, when market sentiment is poor for fund mobilisation because of previous bond defaults in a volatile market, that lessens investor interest in taking risks. According to Finansia Syrus Securities, this environment particularly affects unrated and junk bonds because they carry a higher risk of default than other bonds. These are mostly bonds issued by small and medium-sized companies.

Another funding option is seeking bank lending, but these institutions typically ask for high levels of collateral and analyse the capability of companies to generate cash flow. These considerations make it difficult for companies with a liquidity shortage to secure loans.

Companies can also raise capital from the public through a public offering or issuing private placement shares for a specific new partner. The reason companies might choose this option is to avoid a debt repayment default, which tarnishes their credibility and credit.

ThaiBMA executive vice-president Ariya Tiranaprakit recently warned investors to study information carefully before investing in corporate bonds, particularly when economic conditions are weak, meaning some companies may find it difficult to secure enough funds to meet their debt obligations.

"Since the beginning of the year, sentiment in the debenture market has been weak and confidence was shaken as more companies defaulted on their debt obligations. In addition, cases from previous years have been unable to settle their issues," Ms Ariya said.

"We recommend investors look into provided information carefully before making investment decisions. This includes determining whether the bonds are rated by rating agencies and whether the bond issuers have the capability to generate sufficient cash flow to repay the debts."

Why are property developers opting for bonds?

In the property sector, bonds are proving a popular funding option as interest rates remain elevated, there are increased challenges in securing project loans from banks, and intense market competition is coinciding with sluggish demand.

Many developers, particularly listed firms, often opt for bonds to bolster their financial liquidity during a crisis when financial institutions become reluctant to provide loans and there is a slowdown in sales and unit transfers.

Obtaining loans from financial institutions has become more difficult, whether for corporate or project loans, amid growing caution by banks. Before the financial crisis in 1997, financial institutions offered project loans to developers for both land acquisition and project development.

Following that crisis, developers were mandated to have capital for land purchases and could only seek project loans for construction purposes.

Industry sources noted for condominiums with an extended construction period and income recognition solely upon project completion, banks will grant project loans once the project meets the sales rate set by them.

During the peak of the pandemic, the condo market was considered unfavourable by lenders. Many newly launched condo projects failed to meet sales targets and a number of them have fallen short of the benchmarks established by banks.

Consequently, developers have sought alternative sources of funding to advance their project construction.

Bonds represent the swiftest and most financially efficient option available to developers, according to industry sources.

When developers have lower financial costs, it enhances their competitive edge in the market, both in terms of selling their projects and acquiring land. This is why bonds do a good job of meeting their needs, said the sources.

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