Regulators mull over bond creditor rights
Bank policies hurting other types of lenders
Capital market regulators are discussing reviewing the rights of bond creditors so that they are on par with bank creditors, after bond creditors were badly affected by default payments of listed companies.
Normally, people investing in bonds would hope to get returns on bond yield and principal. But several cases of bond defaults show bond creditors can lose bond yield returns and may even lose all of the principal they invested in the bonds, said Ariya Tiranaprakit, senior executive vicepresident of the Thai Bond Market Association (TBMA).
“It is unfair for bond creditors if banks take all non-collateral assets, such as cash flow or liquidity assets, from debtors, like in a recent case where a company defaulted to repay bond creditors,” said Ms Ariya.
“Banks are well-informed on internal corporate information, particularly when their customers have financial problems, but others such as bond creditors do not have this information.”
Capital market regulators, including the Securities and Exchange Commission, TMBA and underwriters, may discuss this issue with the Bank of Thailand. Other parties have discussed and conducted two hearings to adjust investment laws on debt instruments, aiming for bond creditors to have rights equal to those enjoyed by other creditors.
Since last October, a number of nonrated bill of exchange (B/E) issuers failed to redeem their debt instruments that had matured, raising fears that the defaults will snowball into a crisis.
Four issuers — KC Property Plc (KC), Rich Asia Corporation Plc (RICH), Inter Far East Energy Corporation Plc (IFEC) and Energy Earth Plc (EARTH) — failed to redeem short-term corporate bonds and B/Es worth 3.75 billion baht in the three months to June, while overdue debt instruments remain unpaid, according to TBMA president Tada Phutthitada.
The defaulted debt instruments represented a mere 0.12% of the outstanding corporate bonds at 3.2 trillion baht, or 0.48% if cross-default debt papers are included — far below commercial banks’ bad loan ratio of 2.94% of total loans.
Despite banks providing loans to clients with collateral assets, they should not have the right to demand sudden debt repayment and induce damage on other types of creditors, said Ms Ariya.
Such problems could reoccur in the future if there is no revision as banks, which are well-informed, would take over collateral assets of companies with a liquidity problem and such a move could have a spillover effect, especially for bond creditors who do not have collateral assets to fall back on when debtors default, she said.
As for retail investors in the Stock Exchange of Thailand, they would accrue heavy losses similar to bond creditors as they are considered shareholders of a company, she added.
Under a new law scheduled to be implemented this year by the SEC, B/E sale will be set for specific investor categories, namely 10 individuals of private placement and institutional investors. This is different from high net worth investors or major clients, said Ms Ariya.
B/E should also be used as a tool for short-term fund-raising instead of longterm because this could cause problems with repayment to investors in case a company is in a liquidity crunch, she said.
TBMA senior vice president Sirinat Amornthum said total short-term bonds issued in the first half of this year was registered at 302 billion baht, a 7% decline from 323 billion baht in the same period last year.
Issuance of B/Es remains around 85% of total short-term bonds this year. Debt instruments which have a rating lower than BBB+ declined 20%, and those rated higher than A- recorded a 27% increase.
From a total of 302 billion baht in shortterm bond investment in the first half, 191 billion baht was attributed to high-networth investors, with 106 billion for private placement for the 10 individuals and 5 million for public offering.