Bond credit risk and default cases could rise, especially for issuers in industries hit by the coronavirus outbreak, says the TBMA.

Microscope focused on high-yield bonds

Bond credit risk and default cases could rise, especially for issuers operating in industries swooning from the coronavirus outbreak, says the Thai Bond Market Association.

According to the TBMA, the value of bonds due to mature this year is 600-700 billion baht, of which 50 billion baht is classified as high-yield.

Some 60% of high-yield bonds have asset-backed securities, while 50% have bond representatives, considered an important role in the case of bond defaults, as they will proceed with legal measures against bond issuers on behalf of creditors.

“High-yield bonds warrant a close watch, especially if the economic slowdown affects issuers’ business operations and potentially causes payment default,” said TBMA senior executive vice-president Ariya Tiranaprakit. “On a year-to-date basis, there have been three companies announcing an extension of interest payment.

“For investment-grade bonds, a follow up on companies’ credit ratings is warranted, as ratings could be downgraded to lower investment grades if business performance tumbles significantly in the first quarter.”

Bond creditors have experienced hefty investment losses and slow legal procedures during the past few years from cases linked to Inter Far East Energy Corporation (IFEC) and Energy Earth.

Many retail investors are still seeking compensation through the court system.

Last June, the Civil Court of Southern Bangkok ordered holders of Energy Earth’s two debenture series to file a class-action lawsuit, but the company can still appeal the decision.

In January, Energy Earth signed a composition with 152 debenture and bill of exchange (B/E) creditors worth a combined 426 million baht.

In the case of IFEC, internal disputes and financial scandals have escalated into a crisis for retail shareholders, as some members of IFEC’s board have continued to block scheduling a shareholders’ meeting, prompting investors to take matters into their own hands despite having market regulators in place.

Ms Ariya said there were debentures issued before the Securities and Exchange Commission (SEC) revised bond-issuing regulations. In the event of a default, creditors of those debentures could face similar problems as IFEC and Energy Earth, where they would have to proceed with legal prosecution by themselves or through a class-action lawsuit since there is no bond representative in place.

With several cases of default dating back a few years ago, the SEC revised corporate bond-issuing regulations covering B/Es to enhance investor protection.

The revisions include stipulating that bond-selling agents and market intermediaries, such as asset management companies, securities firms and banks, screen investment products before distribution to clients.

B/E placement is limited to only 10 investors, and there can be no more than 10 B/Es.

If any of these 10 investors is a highnet-worth investor, intermediaries are required to inform investors of the

‘‘ High-yield bonds warrant a close watch, especially if the slowdown affects issuers’ operations and causes a default.

ARIYA TIRANAPRAKIT

Senior executive vice-president, TBMA

product details. The process is similar for bond issuance to ensure that there are bond representatives in place.

Corporate bond issuance, meanwhile, is expected to reach 850 billion baht this year, with 100 billion baht designated for CP Group’s acquisition of Tesco’s Asia business, according to the TBMA.

Year-to-date debenture issuance totalled 93.8 billion baht at the end of February, lower than last year’s corresponding period by 179 million baht.

This year, CP Group is expected to be the largest debenture issuer, as its retail arm CP All requires funds of roughly 100 billion baht to settle the Tesco acquisition deal, Ms Ariya said.

Demand to invest in investmentgrade bonds remains high, especially for local institutional investors, who continue to seek good-quality products against the backdrop of heightening downside risk, she said.