18/05/2020

KBank expects newly-issued debentures this year to reach 900 billion Baht

          KASIKORNBANK (KBank) forecasts that the debt market will remain volatile due to the impact of the COVID-19 pandemic. Over the first four months of this year, issuance of corporate bonds dropped 41 percent. However, newly-issued debentures for the entire year are expected to total 900 billion Baht. The Bank aims to maintain its status as the first-ranked underwriter, garnering a market share of 20 percent.

          Mr. Thiti Tantikulanan, KBank Capital Markets Business Division Head, said that the COVID-19 pandemic has sent shockwaves through financial markets. The debt market is no exception. Bond prices nosedived at first, thus denting NAV of mutual funds, which in turn derailed the confidence of unitholders, who then dumped their investment units heavily in mid-March. As a result, asset management companies rushed to sell their debt instruments at any price in the secondary market to obtain cash for unitholders seeking to redeem their investment units. Following the large unit redemption, these asset management companies hold off their investment in the newly-issued debentures to preserve their liquidity. As a result, the demand for newly-issued debentures slumped.
          In the first quarter of 2020, net asset value (NAV) of the Thai mutual fund system dropped around 800 billion Baht or 15.30 percent, from the figure of 5.4 trillion Baht as of year-end 2019. The figure is now close to that seen in 2016. In March alone, NAV plunged a staggering 700 billion Baht, and fixed-income funds, in particular, recorded a significant redemption of 450 billion Baht. Selling pressure of mutual funds has eased of late, and the market has been more stabilized following the globally synchronized implementation of both fiscal and monetary policy measures from all governments and central banks to mitigate the fallout from the virus.
          As for Thai bond issuance in the primary market, the volume of newly-issued long-term corporate bonds dropped sharply over the first four months of 2020, or 41 percent YoY, from 310 billion Baht to 180 billion Baht, as a result of various issuers’ postponement or delay of bond issuance from the previously scheduled period of March - May, pending any market improvement. Meanwhile, some businesses have resorted to bank loans during this time in which bond issuance is facing challenges, due to plummeting demand among institutional investors, particularly asset management companies that have assumed more cautious investment postures. From individual investors perspectives, they have been more focused on bonds with high credit rating to reduce the risk of default, although their returns from those investment may be lower than those from low credit rating papers. Therefore, even with relatively high rate of returns, bonds that were not rated or with lower credit rating did not to meet their target issue size following investors’ concern.
          Most recently, investors’ concerns have eased somewhat, owing to measures from governments and central banks worldwide to bolster public confidence. Investors have started to return to markets, but only for high quality assets. With regard to bonds, bonds which manage to capture interest are those of well-known organizations and those having high credit rating, for example, government savings bonds series "Thailand Stays Strong", and debentures of Berli Jucker PLC and Charoen Pokphand Foods PLC, of which KBank is one of the underwriters. Their schedule of bond offering from mid-May to early June and it is expected to receive a warm welcome from investors.
          However, it is interesting to see that, while the overall situation has improved somewhat and investor demand has recovered, the cost of funds from bond issuance have not fallen back to where it was but are now standing at the ‘New Normal’ level, suggesting that higher risk is priced-in. Such higher costs has been mainly reflected in increased credit spreads that are 0.20-1.75 percent higher than in the pre-COVID-19 period. The extent of the increase depends on bond structure e.g. terms, credit ratings and the anticipated degree of impact of the economic downturn or the COVID-19 pandemic on the respective industries of the issuers.
          For 2020, KBank expects that approximately 900 billion Baht worth of long-term debentures will be issued, against more than 1 trillion Baht reported in 2019. That would be the first decline since 2015, mainly as a result of the delay or cancellation of debenture issuers’ investment plans, causing fund raising via debentures to also be postponed. Concurrently, debenture issuers in some industries, namely tourism and property, is likely to see lackluster interest from investors, as their performance are the most impacted by COVID-19. Meanwhile, KBank aims to maintain its status as the first-ranked underwriter with the highest underwritten amount and a market share of about 20 percent in 2020. However, KBank will continue to closely monitor and assess the impact of COVID-19 on the overall economy, debenture issuers and bond market sentiment.
          From the perspective of market risk, long-term corporate bonds worth approximately 600 billion Baht (excluding commercial bank debentures of more than 100 billion Baht) will mature this year. These include debentures with a BBB+ rating or lower, worth a total of 180 billion Baht. Some companies may find it difficult to roll over those maturing debentures, and some debenture issuers, despite having high credit rating, but have high exposure to COVID-19, may experience challenges in rolling over or issuing new debentures because of insufficient demand. In recent cases, some debenture issuers have requested bondholders’ approval on the postponement of their redemption date, as they could not pay for the principal. As for the relieve measures, the government and the Bank of Thailand have put the assistance in place to ease market concerns and maintain the functioning of the financial market liquidity and financial system stability. Two key measures are the Corporate Bond Stabilization Fund (BSF) and Mutual Fund Liquidity Facility (MFLF) introduced by the Bank of Thailand, both aimed at reducing COVID-19’s impact. The objective of the BSF is to provide affected bond issuers a temporary fund reserve as their last resort. KBank believes that this measure has had a positive effect on market psychology. However, since its mechanism is relatively complicated, the number of corporate bond issuers that will ultimately seek assistance via this channel is expected to be very limited. For MFLF measure, the outstanding volume of assistance peaked in late April with total value of 56 billion Baht. However, the outstanding balance more recently stood at 50 billion Baht, suggesting a more relaxed state of liquidity.
          Going forward, the uncertainty arising from COVID-19 will remain the key variable that determines market direction, as well as bond yields, for the rest of the year. Once the spread of the virus begins to show signs of permanent containment, and the situation begins to return to normalcy – especially if a cure or vaccine is found – the bond market is expected to see a turnaround as investors may be driven back into risk-on mode again.
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