The Government of Thailand last week held roadshows in Bangkok for its debut securitization, which will help fund construction of a huge office complex set to house several state departments in the Chaeng Wattana district of the capital.
Officials from the Ministry of Finance and state-owned Thanarak Asset Development Co., which is in charge of the project, met with investors over an initial THB9.5 billion ($232.6 million) offering. The Ministry of Finance hopes to raise an additional THB14.5 billion through two follow-up deals in the next two years.
Bangkok Bank, Government Savings Bank, HSBC Securities and Thai Military Bank are the appointed lead managers for the four-tranche deal, issued out of the DAD SPV. Pricing is expected within the next two weeks.
The deal is backed by 30-year lease and fee agreements received by DAD from the Thai treasury department for managing the project. Construction is expected to be completed in the next four to five years, although the first tenants are due to move in around mid 2007.
At closing, the issuer will purchase the rights to collect cashflow from three agreements: leasing of building space, a servicing agreement and furniture procurement. The purchase price of THB40 billion for those contracts will be partly funded by the THB24 billion ABS program, with the remaining balance paid by a subordinated promissory note. The promissory note is also the main form of credit enhancement, along with an upfront reserve account for interest and expenses during construction and the unconditional commitment of stable cashflow from the obligor.
Fitch Ratings has assigned local ratings of triple-A to all four tranches, with tenors of seven, 10, 15 and 20 years. With no straight government bond going beyond 17 years, the 20-year piece will establish a new benchmark.
Most market watchers will be looking closely at pricing and government officials recently said the bonds would be priced at a slight premium over treasurys. When the mandate was awarded, word got out that the lead managers agreed to hard underwrite the deal, while the Government Savings Bank was also tipped to be a major investor.
However, if the government were not involved, there would be questions over the timing of the transaction. Interest rates have gone out substantially in recent months, a process initially instigated by The Bank of Thailand in August to combat inflationary pressures caused by rising oil prices. Seven-year treasurys, for example, have moved from 3.74% in June to 6.58% as of late last week. Currently, 10-year bonds currently trade at 6.92%, while the 14-year benchmark yields 7.15%.
The levels are good news for both retail investors, expected to be involved in the seven-year and 10-year tranches, and institutional accounts.
With such a steep rate rise, it would seem rational to expect private issuers not to go running to the markets anytime soon. However, according to one banker, that assumption is off the mark.
"The interest rate rise is not really impacting the plans of issuers who do not have other options," the banker explained. "In fact, for [issuers] who can't get bank loans, securitization is actually the best way to go in a rising interest rate environment. The cost of doing unsecured debt has increased significantly, so the higher rating of securitized bonds and growing investor understanding makes ABS a more cost-effective way to raise funds. In addition, investors may also be reaching their limits for unsecured products."
Thai issuers, certainly from the consumer finance sector, are not abandoning plans. Siam Panich Leasing recently picked Standard Chartered to handle its debut ABS, a THB5 billion auto loan-backed offering expected in 1Q06, while AEON Thana Sinsap is also lining up a hire-purchase receivables transaction.
Thailand's securitization market is also likely to benefit from a strengthening of its regulatory framework in the coming months. On the accounting side, the Thai Accounting Standards Board recently sent out draft guidelines on securitization treatment to market practitioners for their feedback.
To date, Thai GAAP does not cover securitization. Consequently, accountants and regulators have decided among themselves what accounting standards will be used on specific transactions, with U.S. GAAP chosen on occasions.
The draft guidelines take their lead from IAS39 with some minor differences included to reflect local nuances. Fundamentally, the rules set out what assets used in securitization can be deconsolidated for off-balance sheet treatment. Practitioners view the move as generally positive and the new rules should come into effect early next year.
Further clarification should come from the Securities & Exchange Commission's new ABS decree. To date, issuers have the option of doing deals inside or outside the Thai Securitization Law. The new decree ensures that all deals are done in accordance with the securitization law, and also makes provisions for public offerings. Retail investors can now participate, broadening the investor base significantly.
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