SEC tightens bond regulations after B/E defaults

The Securities and Exchange Commission (SEC) has tightened regulations governing non-rated and non-investment-grade bonds by limiting each intermediary, including asset management companies, to holding one-third of each issue and barring them from being the issuer’s major creditor, a senior official says.

The stringent regulations, which came after a raft of defaults on unrated bills of exchange (B/Es), are aimed at protecting investors.

Under the same set of tightened regulations, the securities regulator requires each intermediary to inspect the unrated bond quality and the issuer’s financial ratio, as well as conduct due diligence before putting money into these debt instruments, said Duangmon Chuengsatiansup, assistant secretary-general of the SEC.

The regulations took effect on Jan 16, but asset management companies are allowed 120 days to prepare.

The SEC has recognised risks incurred from investing in unrated bonds, so it allows only institutional, high-net-worth and accredited investors to take up such debt instruments, said Mrs Duangmon.

Some intermediaries, however, have been spotted acting in an improper manner by offering the entire batch of debt instruments to investors.

Four SET-listed companies and one MAI-listed firm have failed to redeem B/ Es on their assigned dates since last October: Nation Multimedia Group Plc (NMG), KC Property Plc, Inter Far East Energy Corporation Plc (IFEC), E For L Aim Plc (EFORL) and Rich Asia Corporation Plc.

NMG has already serviced 50 million baht in debt from B/Es to Asset Plus Fund Management, while EFORL paid 200 million and IFEC paid the first batch of its 200 million in defaulted B/Es, even as another 200 million in B/Es went into default two weeks ago. IFEC contends that conflicts between major shareholders caused the B/E defaults.

Although the defaults resulted from internal difficulties and not the economy, confidence in unrated B/Es has subsided. Several stock market participants have warned non-rated B/E issuers to prepare to seek funding from financial institutions or other financial sources in case the debt instruments’ holders refuse to roll over.

Pariya Techamuanvivit, the SEC’s director of corporate affairs, said the stringent regulations are intended to stop asset management firms from getting involved in shadow banking activities by investing in unrated and non-investment grade debt instruments.

Shadow banking entails non-banking companies carrying out services similar to those typically offered by banks.

The SEC requires asset management companies and other intermediaries to examine the quality of such debt instruments and disclose that information to investors as risk is limited when investors have sufficient data to make informed decisions, he said.