Thailand Capital Markets Deal
Inflation was a permanent threat in 2011, and Thailand’s first inflation-linked bond an intelligent solution. For introducing the format to South-East Asia, the Kingdom of Thailand’s Bt40bn inflation-linked bond is IFR Asia’s Thailand Capital Markets Deal of the Year.
Thailand was quick to turn inflation fears into an opportunity. In introducing inflation-linked bonds, the kingdom was able to attract foreign funds and give investors an opportunity to shield themselves from surging prices.
HSBC sole arranged the deal that was not only the first of its kind in South-East Asia, but also the country’s first Thai baht-denominated bond to be distributed globally via syndication.
The issue, launched at a wide Bt20bn–Bt40bn size range, quickly swelled to Bt40bn when bookbuilding began on July 6 and pricing came in at 1.20%, or at the higher end of the unofficial price guidance of 1.00%–1.25%.
Thailand’s linkers came shortly after Hong Kong’s own inflation bonds.
However, Hong Kong’s issue was far more of a domestic affair, whereas some 37.5% of Thailand’s inaugural issue was allotted to investors outside the Kingdom.
This meant that the deal enabled Thailand to diversify its investor base and extend the duration of its liabilities – two key planks in the market’s continued development.
The issue was so successful that Thailand’s Public Debt Management Office indicated it would re-open the bond and possibly make the linkers available in different tenors.
Issuing inflation-linked bonds was the perfect tonic to investors’ concerns about interest rate hikes.
The Bank of Thailand has been among Asia’s most hawkish central banks, having tightened rates consistently for more than a year to ward off inflation before it finally paused on October 19.
This was when it left its benchmark one-day repurchase rate unchanged at 3.50% to help the economy during the floods that have ravaged the kingdom.
With the worst floods to hit Thailand in half a century expected to keep prices elevated, the inflation-linked bonds are expected to hold up well in the secondary market.
Despite its success, the transaction was far from straightforward. Thailand was in an election mode at the time, and off icials of the Ministry of Finance faced a challenge to assure investors that a stable government would emerge.
So, the linkers received a boost when the Pheu Thai Party of Yingluck Shinawatra emerged as the clear winner in the July 3 elections.
Additionally, the linkers required local regulations to be amended, creating a new market and paving way for future issuance.
“One of the reasons why this was an amazing deal was the regulations that needed to be changed in Thailand for this issue to open up, and this was a long-term fundamental change in how business was done,” said James Fielder, HSBC’s head of local currency syndicate in Asia.
Previously, pension funds in Thailand were not allowed to invest in any instrument linked to inflation and it was the change in this regulation that paved the way for the linker.
Regulations of the Thai Securities and Exchange Commission and the central bank also had to be tweaked so as to pave the way for the launch of this new product.
“There was a lot of work behind the scenes, like investor education, and also getting a new system in place at the Thai stock exchange for the linkers to be traded. There was a lot of additional work on this deal that was peripheral, but critical,” Fielder said.
Syndication also emerged as a more efficient way
of selling a new type of instrument as it provided certainty of funding and allowed the borrower to
raise more funds than would have been possible via an auction.