Bond Market Update
5 January 2016
During the past decade, the
the development of corporate bond market in Thailand
has continued to progress on its market depth and its importance as an alternative funding
source for corporations. Low interest rate environment prompted many firms to issue
debentures to lock in cheap funding while demand remained strong in search for yield
amid excess
ss liquidity environment. Credit spreads of high credit profile issuers continued to
tighten. In contrast, concerns on weakening domestic consumption, slowdown in key
export markets
markets, and potential adverse changes in liquidity saw credit spreads of “BBB”
rating
ting and unrated bonds widening. The shortening of maturity profile in the corporate
bond market is expected to continue given the growth of lower credit quality issuers which
normally offer smaller issue size,
size coupled with investor concerns over potential pickup in
interest rates.
Nitawan Israsena na Ayudhya, CFA
nitawan@trisrating.com
Watana Tiranuchit, CFA
watana@trisrating.com
•
Corporate bond market has e
evolved over time
The corporate bond market in Thailand has grown signi
significantly
ficantly over the past 10 years,
rising at a compound annual growth rate (CAGR) of 17%. Total amount of outstanding longlong
term corporate bonds*
bonds (maturity of more than one year at the issuance date) was Bt 2,058
billion at the end of November 2015, surpassing the Bt1,835 billion in bonds outstanding at
the end of 2014. And this is to compare with the very small amount of Bt 385 bil
billion only in
the past decade. The market depth,
depth measured as the amount outstanding as a percentage
of gross domestic product (GDP),
(
increased steadily from 5.5% in 2004 to 14% in 2014
(Chart 1). Since the global financial crisis (GFC) in late 2008, corporations
corpora
have significantly
stepped up their bond issuance amid low interest rate environment to lock in cheap
funding whether for the purposes of refinancing or new investments. From 2009 to
November 2015, yield on five-year government bonds fell to the tight range of 2%-4%
(Chart 2).
Chart 1: Outstanding Corporate Bonds and GDP
2,500
16.0%
14.0%
2,000
Billion baht
Kornkamol Thavisin
kornkamol@trisrating.com
12.0%
10.0%
1,500
8.0%
1,000
6.0%
4.0%
500
2.0%
0
0.0%
Corp bond (LHS)
Corp bond/GDP (RHS)
Sources: 1) BOT
2) ThaiBMA
3) TRIS Rating
* corporate
orporate bonds and debentures are used interchangeably in this article
Bond Market Update
Chart 2: Five-Year Government Bond Yield and MPC Rate
7.00
6.50
5-Year
Year Government Bond Yield
MPC Rate (Monetary Policy Committee Rate)
6.00
5.50
5.00
4.50
4.00
(%)
3.50
3.00
2.50
2.00
1.50
1.00
0.50
Mar-15
Sep-15
Mar-14
Sep-14
Mar-13
Sep-13
Mar-12
Sep-12
Mar-11
Sep-11
Mar-10
Sep-10
Mar-09
Sep-09
Mar-08
Sep-08
Mar-07
Sep-07
Mar-06
Sep-06
Mar-05
Sep-05
Mar-04
Sep-04
Mar-03
Sep-03
Mar-02
Sep-02
Mar-01
Sep-01
Mar-00
Sep-00
0.00
Sources: 1) BOT
2) ThaiBMA
3) TRIS Rating
•
Financial disintermediation will continue
Government policy and measures underpinned the development of local bond market
following the 1997 Asian Financial Crisis. At present, many measures, such as the
regulatory framework and market infrastructure,
infrastructure continue to support and strengthen the
role of the debt securities market as an alternative
ve funding source for the private sector.
The growth of the local bond market allowss the corporations to raise debt at more
attractive terms than traditional borrowing from financial institutions. Chart 3 shows that
the share of corporate funding through d
debt
ebt securities issuance to total borrowing (bank
loans and bond issuance) rose from 6.9% at the end of 2004 to 12.5% at
a the end of 2014.
As disintermediation continues,, bond financing is expected to grow and complement
traditional borrowing,
borrowing giving large and medium-sized
sized corporations broaden access to
funding.
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5 January 2016
Bond Market Update
Chart 3: Proportion of Corporate Bond Funding to Total Borrowing
16
16.0%
14
14.0%
12
12.0%
10
10.0%
8
8.0%
6
6.0%
4
4.0%
2
2.0%
0
0.0%
Sources: 1) BOT
2) ThaiBMA
In addition to providing funding diversification, the corporate bond market offers private
issuers lower borrowing costs. Chart 4 compares the average coupon rate of “A” rated
bond and bank lending rate.
The accommodative monetary policy by the Bank of Thailand (BOT) to stimulate the
economy along with excess liquidity in the system have seen many key market rates such
as those on bank deposit and government bond yields maintained at the low levels.
Consequently, it was not a surprise that most bond issues have been successfully absorbed
a
by investorss in search for higher yield.
Chart 4: MLR, 1
1-Year Fixed Deposit Rate, Yield of Three to Five-Year
Five
“A” Rated Bonds
8.00
7.00
6.00
5.00
% 4.00
3.00
2.00
1.00
MLR (Minimum Lending Rate)
Yield of 3-5-year "A" Rated Bond
Nov-2015
2014
2013
2012
2011
2010
2009
2008
0.00
Deposit Rate (1 year)
Sources:: 1) BOT
2) TRIS Rating
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5 January 2016
Bond Market Update
•
Bond market o
offers attractive funding source for the majority
m
of issuers
Chart 5: Average Spreads at Issuance Date of Three to Five-Year
Year “AAA” “AA” ”A” “BBB”
and Unrated Bonds
350
300
bps.
250
200
150
100
50
0
2011
2012
AAA
AA
2013
A
BBB
2014
Nov-2015
Unrated bond*
*Unrated bonds exclude issuances with issuer’s rating
Source: TRIS Rating
Chart 5 illustrates the average credit spreads of high credit profile issuers (“A” rating and
above).. For instance, “AA” rated issuers had credit spreads of around 60 basis points (bps)
at the end of November 2015. The level has continued to tighten from the previous periods
as investors looked ffor higher risk-adjusted
adjusted returns, and benefited issuers with a relatively
lower funding cost.
However, the picture paints a different story for lower credit quality
qual debentures such as
the “BBB” rated and unrated ones. Issues with lower credit quality faced widening credit
spreads. For example, buyers of unrated bonds demanded credit spreads of around 318
bps. Concerns over potential rate hikes by the US Federal Reserve and reduced liquidity,
combined with Thailand’s own economic slowdown
slowdow and a deteriorating growth outlook in
key export markets, prompted investors to demand higher credit spreads to compensate
for such rating sectors.
•
Medium-sized
Medium
corporations enter the market
During the last three years, Thailand’s most economic readings pointed to the downside
risks to growth, due to prolonged political instability and weaker domestic demand from
lower farm incomes and high household debt. The deterioration in economic activity
increased the rate of new non-performing
performing loans (NPL) formation.
formation NPLs in the banking
system surged from 2.15% in 2014 and in 2013, to 2.78%
% at the end of September 2015.
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Bond Market Update
Concerning about deteriorating asset quality, many banks became more stringent about
granting loans though there was ample liquidity in the financial system. The reluctance by
banks to expand loans to lower credit profile customers, especially medium-sized
medium
enterprises, cause
caused these firms to look for other available funding sources. Normally, an
issue size of a lower credit profile issuer or an unrated issuer is smaller than that of an issue
with a higher credit profile. The difference reflects some limited access of such firms to a
certain group of investors in the bond market. Nevertheless,
s, Chart 6 shows that the
number of such small issue size (less than Bt200 million) jumped to 49 issues during the
first 11 months of 2015 (year
(
to date -- YTD), almost doubled that in 2014 (26 issues) and
while the number in 2013 stood only three issues.
Chart 6: Growth of Small Issue Size
60
No. of issues
50
40
30
20
10
0
2011
2012
2013
2014
Nov-2015
issue size < Bt200 milliom
Source: TRIS Rating
•
Banks
anks are selective in issuance while nonfinancial corporations dominate the
market
arket
Chart 7 shows that nonfinancial corporations were the largest issuers. In contrast, most
banks in Thailand, especially the large- and medium-sized
sized banks
banks, continue to benefit from
their franchise networks and stable deposit bases. In general, banks entered the corporate
bond market to raise additional capital by issuing Basel III-compliant
III compliant instruments such as
subordinated or hybrid debts to be qualified as tier 1 and tier 2 capital securities.
The breakdown by sector of nonfinancial corporations on Chart 8 shows that the corporate
bond market in Thailand was a diverse funding source for private sector. YTD indicates an
increase in borrowing from issuers in the telecom, property development (residential) and
construction material sectors
sectors, while bond issuance in energy and commerce sectors
TRIS Rating Co., Ltd
5
5 January 2016
Bond Market Update
declined.
Chart 7: Thai Corporate Bond
Bond Issuance: Financial and Nonfinancial Corporations
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
2011
2012
2013
Financial*
2014
Nov-2015
Nonfinancial
*Financial includes banks, leasing, consumer finance, and securities
rities companies
Source: TRIS Rating
Chart 8: Thai Corporate Bonds by Sector
100
100%
90
90%
80
80%
Others*
70
70%
Structured Finance
Commerce
60
60%
Multinational
Telecom
50
50%
Agri/Food
Construction Material
40
40%
Residential
Energy
30
30%
Other Financials
20
20%
Bank
10
10%
0
0%
2011
2012
2013
2014
Nov-2015
* Others include issuers
issuers from sectors such as hotel, industrial estate, other property and
construction, transportation, and others
Source: TRIS Rating
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5 January 2016
Bond Market Update
•
Issuers’ credit profile and interest rate trend influence the maturity
Most investment grade issuances had a tenor of at least three years.
years High quality issuers
might extend the tenors up to 12 years and the bonds were in demand.
demand In contrast, many
unrated issuers were req
required
uired to offer relatively higher coupons and shorter tenors for
investors to compensate for the perceived higher risks.
However, there is no pricing benchmark for the unrated bonds.
bonds Therefore, TRIS Rating is
concerned that any mispricing, coupled with abrupt
upt credit deterioration would likely
likel
accelerate market turbulence and liquidity problems. As a result, issuers which are not
prepared for liquidity risks and lack a back-up facility are highly exposed to refinancing risks
when market confidence falls. As mentioned earlier, small issues of corporate bonds were
issued by companies with lower credit profiles. This segment grew rapidly recently,
shortening the average corporate bond tenor. Chart
hart 9 illustrates that the share of
debentures with a tenor of up to three years climbed to 63% at the end of November 2015,
compared w
with only 28% at the end of 2011. The segment has continued to dominate the
overall maturity profile of the market.
Furthermore, investors are more cautious because of potential
al changes in interest rate
trend, given risk of higher rates in the US and reduced liquidity, investing
in
in long-term
bonds becomes less attractive in this environment. Accordingly, we expect the growth in
shorter-term
term corporate bonds will continue, especi
especially
ally once the interest rates in the local
market start to pick up.
Chart 9: Maturity Profile of Corporate Bonds at Issuance
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
2011
2012
Less than 2 years
2-3 years
2013
>3-5 years
2014
Nov-2015
More than 5 years
Source: TRIS Rating
TRIS Rating Co., Ltd.
Business Development Department, Tel: 0-2231
2231-3011 ext218 / Silom Complex Building, 24th Floor, 191 Silom Road, Bangkok 10500, Thailand
www.trisrating.com
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