Laos makes Thai baht comeback

IFR Asia 1231 - 09 Apr 2022 - 15 Apr 2022
4 min read
Emerging Markets, Asia
Kit Yin Boey

Thai high-net-worth investors piled into a Bt5bn (US$149.3m) dual-tranche bond sale from the Lao People’s Democratic Republic, reopening the door to a funding market that has been shut to the sovereign for almost three years.

A Bt1.12bn three-year tranche was priced at 5.8% and a Bt3.88bn four-year piece at 6.4%. Based on Thai government bond yields quoted in early March when the notes were priced, the respective yields were equivalent to spreads of around 481bp and 522bp. The notes were settled via issuer Ministry of Finance Laos on March 31.

Laos has not visited the baht-denominated market since mid-2019 after Tris downgraded it to BBB from BBB+. The rating further slipped to BBB– in May 2021 on concerns over a weakening economic recovery and Laos’s ability to manage its liquidity, as well as fiscal and external vulnerabilities.

Thai commercial banks tend to avoid bonds rated BBB and below, leaving the sovereign to target HNW investors through securities firms.

Bankers said Thai HNW investors felt compensated by the juicy yields and have growing confidence that the Laotian economy is set for a turnaround with last year’s completion of a 422km railway that runs from Vientiane to Boten in China's Yunnan province.

The railway is seen as a major catalyst to Laos’s economic development. Since the line opened in December, it has already carried more than 2.25 million passengers and 1.31 million tonnes of cargo. This has encouraged the Laotian government to project a trade surplus of US$1.55bn for 2022, up from US$1bn in 2021, despite economic challenges caused by the Covid-19 pandemic.

Demand was so strong for the baht bond that the joint leads stopped taking orders soon after the book exceeded Bt5bn as Laos could not upsize beyond the limit of Bt5bn approved by Thailand’s Ministry of Finance.

KTBST Securities, Finansia Syrus Securities, Kingsford Securities, Merchant Partners Securities, Philip Securities Thailand, UOB Kay Hian Securities Thailand and Siam Wealth Securities were joint lead managers for the deal. Twin Pine Group is financial adviser to the issuer.

The new bond is aimed at supporting Laos’s liability management plans, with the bulk of the proceeds likely to refinance funding sources used to repay maturing debt last year. The sovereign also has a Bt1bn bond due to mature on October 5.

Although the bond is small compared with Laos’s public external debt burden of about US$10bn, the completion of the fundraising will be a huge relief after three failed attempts at a US dollar bond sale over the last two years. Not until the third attempt did the sovereign disclose that it was in technical breach of some of its financing agreements, harming its credibility with investors.

Fitch, which rates Laos at CCC, said the sovereign faces an average of US$1.16bn in debt repayments each year between 2022 and 2025. The country managed to repay the US$150m notes that matured in June 2021, along with a combined US$165m-equivalent in baht-denominated bonds in October and November last year.

“We will continue to push the Laos government to undertake baht bond sales as we see good appetite among Thai investors, and current low rates compared to if they were to issue US dollar bonds,” said one banker on the deal.

Pricing on the new deal would be equivalent to about 7%–8% for the tenors of three and four years if swapped into US dollars, far lower than the sovereign could expect to pay for a new dollar issue.

Laos, rated Caa2 and CCC respectively by Moody’s and Fitch, had tried to market a five-year 144A/Reg S US dollar deal in March 2021 at initial guidance of 11% area before pulling it. With the surge in US Treasury yields since then, the sovereign could expect to pay even more now.