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Thailand's corporate bond issuers hope for perpetual motion
February 6, 2017 / 3:35 AM / 10 months ago

Thailand's corporate bond issuers hope for perpetual motion

* Three companies plan to raise Bt22bn this month

By Kit Yin Boey

SINGAPORE, Feb 6 (IFR) - Three Thai companies are planning to sell perpetual bonds totalling up to 22 billion baht ($627 million) this month, despite lingering doubts over the ability of investors to understand the risks of such instruments.

The largest offering will come from Charoen Pokphand Foods , which plans to sell perpetual non-call five securities in late February for 15 billion baht, with a 5 billion baht greenshoe option.

Ananda Development returns for its annual foray to raise up to Bt1bn in the perpetual non-call five format, via CIMB Thai in mid-February. Then, Property Perfect will sell maiden perpetual bonds, also callable after five years, for up to 1 billion baht through joint leads Globlex Securities, KGI Securities and Capital Nomura Securities.

Interest in perpetuals has been growing, thanks to a combination of investors chasing yield and issuers trying to lock in fixed coupons ahead of expected increases in benchmark rates.

“Investors are getting more familiar with subordinated debt,” said a banker involved in one of the planned issues.

“For issuers, it is favourable to obtain the equity treatment and they are also expecting rates to rise. So, they want to lock in current rates over a longer term.”

Thailand’s government bond yields have risen sharply since in November, when CP All sold the last perpetual bonds. The five-year TGB yield was at 2.18 percent on February 1, against 1.98 percent on November 15. The rise was steeper at the long-end of the curve with the 10-year jumping 31 basis points to 2.8 percent over the same period. With the US Federal Reserve poised to raise rates as many as three times later this year, issuers are worried that benchmark rates will continue to climb.

Perpetuals were not always the first choice of issuers. In 2012, Thailand’s Securities and Exchange Commission flagged investment risks in undated subordinated notes when PTT Exploration and Production became the first Thai corporate issuer to launch a perpetual offering to raise 5 billion baht at 5.85 percent. The regulator was concerned that investors, particularly in the high-net-worth segment, would not understand that they could be saddled with the securities forever if the issuer did not call them.

The warning dented demand for the PTTEP bonds and, since then, only a handful of companies have turned to the format, mainly to win equity accounting treatment and manage their gearing ratios. Indorama Ventures sold a 15 billion baht 7 percent perpetual issue in 2014, before Ananda followed with a 1 billion baht 9 percent offering in 2015 and a 1 billion baht 8.5 percent in 2016.

However, last November, CP All successfully sold 10 billion baht of perpetual securities to institutional and high-net-worth investors. The bonds featured a step-up coupon mechanism that started at 5 percent for the first five years and would reset to a floating-rate structure thereafter.

That has encouraged sister company CP Foods to tap perpetual bonds to fund its debt-fuelled acquisition drive, through Krung Thai Bank and Siam Commercial Bank.

All three planned perpetual issues are expected to have step-up mechanisms to increase coupon payments if they are not called.

Companies, which do no want to raise their debt ratios or are keen to avoid rating downgrades, tend to favour perpetual bonds.

CP Foods stands to benefit from a 50 percent equity treatment on the bonds in what rating agency Tris called an “intermediate” equity content. This equity treatment will fall gradually to zero in year fie when the bonds are due to be called.

The SEC warning is repeated in the offering documents of all three issues, but bankers say they are actively educating and informing investors of the risks associated with each transaction.

“There are always risks of deferrable coupons and that the issuer will not call because of certain factors, such as a sharp increase in rates when the call is due,” said another banker.

“Yes, the investors say they are familiar with the product but, really, the test will come only if and when the notes are not called.” (Reporting by Kit Yin Boey; Editing by Daniel Stanton)

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