KTB warns over potential debt default rise

Financing costs may rise for low-rated firms

Defaults of debt instruments are expected to keep rising as the fixed-income market enters the early stages of tightening from rising interest rates amid tepid appetite for such notes, says the head of KTB Securities Thailand (KTBST).

“The credit cycle for Thailand and the global market has already reached the mature state, and from now on we’re going to see more and more tightening,” said executive chairman Win Udomrachtavanich.

With the extended period of low interest rates and excessive liquidity, companies have relied more on credit, especially through issuing debentures in recent years.

“We already reached the peak of the super-liquidity period and when interest rates start to rise, the bond markets are expected to tighten up,” said Mr Win.

Demand for bonds is expected to whittle down in the coming period after the Securities and Exchange Commission (SEC) tightened its regulations concerning bonds and the issuance of bond funds, which has surged at a fast clip over the past several years, due to signs of a slowdown.

When the bond market is tightened, investors tend to increase their holdings in debt instruments with good credit ratings and decrease their holding in those with lower or below investment grade ratings, which causes bond coupon rate spreads to widen.

Mr Win said the series of defaults on bills of exchange (B/Es) by listed companies also boosted demand for bonds with good credit ratings.

“As a result, those corporations with good credit ratings might be getting even lower financing costs, while those with lower or below investment grade ratings will find financing costs even higher,” he said. “So, I expect the default rate in Thailand to increase in the future given these circumstances.”

Thailand’s default rate is still considered low compared with Asia’s high-yield default rate, which stood at 0.9% in 2016, said Mr Win.

Since last October, a number of nonrated B/E issuers failed to redeem their debt instruments that had matured, raising fears that the defaults will snowball into a crisis.

Financially ailing Energy Earth Plc was the latest to default. Energy Earth last month said in a filing with the Stock Exchange of Thailand that it had already defaulted on bonds, B/Es and bank loans worth 7 billion baht.

Meanwhile, Lertchai Kochareonrattanakul, senior director for corporate funds at Fitch Ratings Thailand, said that credit ratings for rated bonds in Thailand are expected to be stable this year, although some could see ratings changes in the near future.

“This year, credit ratings for Thai corporate bonds are expected to become more stable compared with last year, supported by the moderate economic recovery, while consumer demand has not yet fully recovered,” he said.

The upstream oil and gas sector is expected to be stable as operators are able to cut operating costs, but risks concerning reserve replacement remain.

He said the telecommunications sector is facing a somewhat hard time, prompted by fierce competition and more capital expenditure required for supporting data growth.

“One telecommunications company in particular warrants close monitoring as its market share has been declining, and if it continues to decrease then the company’s credit rating might be affected,” Mr Lertchai said without naming the firm.