Laos turns home as Thai route shuts

IFR Asia 1306 - 07 Oct 2023 - 13 Oct 2023
6 min read
Emerging Markets, Asia
Kit Yin Boey

The Lao People's Democratic Republic is offering its first Thai baht bond in its home market, as a sovereign downgrade to junk essentially shut down a key cross-border funding route.

In late September, Thai rating agency Tris demoted the cash-strapped sovereign to BB+ from BBB–, a move that is expected to cause much of the demand from Thai investors to dry up. This was followed by a downgrade in Laotian state-owned EDL-Generation to BB+ from BBB–.

Regulations require foreign issuers to be rated at least Triple B in order to sell bonds in Thailand, though the Thai government could grant an exemption. In any case, most Thai investors tend to steer clear of such low rated bonds.

“This will mean the Thai market is now closed to these Laotian credits,” said a banker on previous deals for Laos. “The downgrades have sparked off so many calls from our investors holding both sovereign and EDL-Gen paper as they are very concerned about the impact.”

Demand had begun to wane even before the latest downgrades. In early August, Laos was only able to pull in Bt785.5m (US$22.6m), far short of a targeted Bt3.6bn, for a dual-trancher of 6.1% three-year notes and 6.6% four-year notes. EDL-Generation could only muster a total of Bt440.4m of a targeted Bt2.7bn for 6.3% three-year and 6.9% four-year notes in late August.

With Bt3.6bn of baht bonds maturing in November and the previous Thai offering falling short, Laos in mid-September launched a "budget balancing bond" onshore to fund the refinancing. It aims to raise Bt3bn through a series of issues to the public with coupons varying from 5% to 8% for tenors of one to 10 years. The three-year tenor is at 6%, a tad tighter than the 6.1% it paid for the August offering in Thailand. Subscription closes on December 19.

Interest has been very strong with indications that Laos could raise up to Bt5bn, but the government has decided not to absorb all the demand so that it can return in the future to tap more baht-denominated funds, said a source close to the borrower.

“Investors like commercial banks and other financial institutions in Laos do hold some baht-denominated funds and the fact that the government can raise funds in that currency shows there’s ample liquidity for and interest in foreign currency bonds,” said the source.

Raising foreign-currency funds via bonds is not new to the government, which has sold US dollar bonds onshore in recent months.

Laos is currently marketing a US dollar bond to raise up to US$100m in tenors of one to 10 years at coupons of 5% to 8% with subscription to end on December 19.

Both the baht and US dollar bonds are being sold via BCEL-KT as lead arranger, and Lanexang Securities and Lao-China Securities as arrangers.

So far, Laos, which has more than US$10bn of foreign debt, has met interest obligations on its baht-denominated bonds, paying Bt75m last week, and had set aside another Bt350m for interest payments that were scheduled for October 5.

The sovereign has an international rating of Caa3 from Moody's. Fitch withdrew its CCC– rating in October 2022.

Tricky timing

One deal from a Laotian credit that is being affected by the downgrades is Xayaburi Power which is offering its second baht-denominated bond. The hydroelectric power producer owns a run-of-river power plant in Laos but sells the bulk of the electricity to Thai state-owned utility Electricity Generating Authority of Thailand.

Despite its parentage – Thai conglomerate CK Power owns 42.5% – Xayaburi is finding it hard to pull in strong interest in the new deal, which is targeted to raise Bt5bn in tenors of three, four and five years, said a banker on the deal.

“It has been super challenging to get investors in, even though the indicated pricing guidance provides some concession," said the banker. "Not only do they have to cope with dwindling appetite for Triple B credits in recent months, but now they have to struggle with a downgrade of the sovereign.”

Xayaburi, rated BBB+ by Tris, was heard to have indicated preliminary price talk of 4.9%–5% on a three-year tranche, 5.1%–5.2% on a four-year piece and 5.3%–5.4% on a five-year tranche. In comparison, similarly rated Thai property developer Phatra Leasing raised Bt900m of three-year bonds at 4.6% in late August.

Tris cited the sharply depreciated Laotian kip and high inflationary pressures in Laos as major reasons behind the downgrades. The kip has depreciated by about 18% this year against the US dollar, according to LSEG data.

The rating agency expects consumer price inflation to average 30% in 2023, up from its earlier estimate of 23%. Inflation fell from 41% in March to 28.8% in June, according to official data.

“The debt service burden of the Lao PDR relative to the size of the economy will likely remain elevated over the next few years,” said the Tris report. “This departs from our prior view of a gradual decline, due to the deeper-than-expected depreciation of the LAK (Laotian kip).”

That will keep the level of public debt near 100% of GDP with public interest expenses set to account for a fifth of government revenues for 2023–2024, Tris wrote. Laos has external debt of US$10.5bn while domestic public debt was KN26.6trn (US$1.3bn) at the end of 2022.

Tris also noted that Laos has multiple sources of foreign-currency funding to meet commercial debt obligations, including its revenue inflows, monetising state-owned assets, receipts from mining concessions, borrowings from domestic commercial banks and raising funds in the domestic bond market.

Even if Laos's ongoing fiscal consolidation plans and efforts to cut inflation eventually restore its investment-grade rating, a Thai banker said Tris typically takes about 12–18 months to finalise a rating review. That indicates that the Thai bond market will remain closed to Laos and EDL-Generation for at least that long.