Untitled Document

Background

The Thai bond market has grown rapidly in recent years after the 1997's economic crisis. To help support cash-strapped financial institutions, in June1998 the government issued government bonds for the first time in the decade. The total amount of government bonds issued under this program was THB 500 billion and this has opened a new era for the Thai bond market. The government continued to issue bonds since then with the primary objective to finance budget deficit resulted from the crisis. The substantial amount of new government bonds coupled with successively downtrend of interest rates have contributed to the robust of the bond market as evidenced by a significant increase in both market size and trading volume. The outstanding value of total bond market increased from THB 547 billion in 1996 to 498 issues worth THB 1,507 billion at the end of 2001. Trading volume in the secondary market rose from a daily average of only THB 822 million in 1996 to THB 6,472 million in 2001.

Regulatory Environment

The Bank of Thailand (BoT) supervises the operation of banking and finance businesses while the Securities and Exchange Commission (SEC) supervises the primary and secondary market for securities business. The issuance and offering of securities are governed by the Securities and Exchange Act 1992 (B.E. 2535).

In November 1994, 'the Bond Dealers Club' was set up to be the secondary market for debt securities. The BDC was upgraded to "The Thai Bond Dealing Centre (Thai BDC)' in April 1998 after it was granted the 'Bond Exchange' license from the SEC. The Thai BDC goals are to provide an environment for fair and secure trading, to monitor trade and to disseminate information on the secondary bond market. The Thai BDC also functions as a self-regulatory organization (SRO) and has implemented a number of standards and conventions for bond trading.

Types of Securities

Bonds issued in Thailand can be divided into two major components: government and corporate debt securities. The market is dominated by Government debt securities, which currently account for approximately 85 % of total market outstanding.

1. Government debt securities consist of four major types;

1. 1 Treasury Bills (T-Bills) are short-term debt instruments with maturity less than 1 year. The bills are sold on a discount basis.

1.2 Government bonds are medium to long-term debt instruments issued by the Ministry of Finance. They consist of three types; Investment bonds (IB), Loan bonds (LB) and Saving bonds (SB). While IB has not been issued since 1991 and there are only few issues remaining, LB captures the majority of the market as they are issued for financing budget deficit. SB is issued to provide households with alternative source of saving.

1.3 Bank of Thailand (BoT) bonds, Financial Institution Development Fund (FIDF) Bonds and Property Loan Management Organization (PLMO) bonds are issued by the central bank, the FIDF and The PLMO respectively. These bonds are no longer issued and there are only few remaining issues.

1.4 State Owned Enterprise (SOE) bonds are medium to long-term debt instruments issued by State Owned Enterprises. This can be categorized into 2 types; guaranteed and non-guaranteed by the Ministry of Finance (MoF) of which the guaranteed bonds account for 86% of total. However, there are restrictions on the government to provide debt guarantee for not exceeding 10 % of total budget expenditure. Only MoF-guaranteed bonds are eligible for liquidity reserve requirement, as same as government bonds.

2. Corporate debt securities

The corporate sector began to issue bonds in 1992 after the enactment of the SEC Act that has eased criteria for the issuance of corporate bonds. Structures of bonds include Straight, Floating Rate Notes (FRN), Amortizing and Convertible. The bonds with more varying features are increasingly issued in recent years.

Issuing Process

Government bonds and T-Bills are issued through auction process, which is organized by the central bank on a weekly basis. Term and size of the auctions will be announced prior to the auction date. Auctions are held on a competitive price auction (American auction) basis. In June 2002, there is a launch of Non-competitive Bid (NCB) availalble for small investors to submit bid in the range of 4-40 million.

For State Owned Enterprise (SOE) bonds, the issuance and auctions are managed by the Public Debt Management Office (PDMO). The auctions are made through Dutch auction where the entire issues are awarded to bidders (underwriters) who offer the lowest cost of funding.

For corporate bonds, issuance is subject to the SEC’s approval. Approval is granted on ‘issuer’ basis,enabling issuers to offer bonds several times in 1 year. Credit ratings are required for all bond offerings with the exception applied to those offered to no more than 10 investors, or in the amount not exceeding 100 million or to creditors for debt restructuring.

Next >>