TRIS predicts healthy year for issuances

An upward trend of interest rates will have little impact on the funding costs of debt issuers and the bond market over the next 12 months as the pace of any rate rises is likely to be slow, says TRIS Rating.

“We see the prospect of interest rate rises continuing to be the key driver for corporate bond issuance. Issuers aim to lock in the low interest costs attainable in the bond market, as the low rates remain attractive for most prospective issuers,” the local credit rating agency said in its bond market update report.

TRIS said the rise in government bond yields, coupled with a slight increase in the 2107 credit spread, have translated into higher borrowing costs for corporate debt issuers in 2017, but a dramatic increase in the average coupon rate is not expected.

The average coupon for three-year bonds in the “A” rating category increased to 2.67% in the first half of 2017 from 2.30% in 2016 — significantly below the interest rates for bank loans.

But the recent default by a corporate bond issuer has dented investor confidence somewhat in the “BBB-” credit rating category and below, said TRIS.

Based on the market feedback for some recent bond issues, the credit spreads for low-rated issuers have widened significantly, reflecting the higher-risk premium demanded by investors. The demand for debt with low ratings has fallen.

The lower demand has translated into heightened rollover risk for some weak credits. On the other hand, the demand for highly-rated issues is moving in the opposite direction, compressing the credit spreads for some recent issues in the “A” rating category and above, the agency said.

“All these market indications suggest a mild flight-to-quality phenomenon. We expect debt issuances in the bond market to slow down this half. But overall, the volume of bond issuances in 2017 is likely to be around the same level as in 2016, within the range of 750 to 800 billion baht,” said TRIS.

The major downside risk factor for credit this year is a rapid rise in interest rates that would stress the credit market.

“We expect the pace of the shift from traditional bank loans to debt offerings in the bond market to slow down in 2017,” TRIS said. “The impressive growth of debt offerings in the bond market over the past three years was powered by a prolonged period of low interest rates and strong investor appetite for bonds ... While we expect the longterm trend to continue for many years to come, the slope of the trend line after 2017 may not be as steep as during 2014-16.”