Thai corp bond spreads to narrow as supply eases

* Spread over govt bonds to narrow further on lower supply

* Companies aiming new issue more at retail buyers

* For a calendar of upcoming issues, click on [ID:nBKK177831]

By Arada Therdthammakun

BANGKOK, June 29 (Reuters) - A likely drop in the volume of new, top-rated corporate bonds in Thailand over the next two months has pushed up demand in the secondary market, further narrowing the spread over government bonds, fund managers say.

To lock in low rates for long-term financing, Thai firms issued 180 billion baht ($5.3 billion) of bonds in the first five months of 2009, compared with 130 billion baht in the first half of 2008, according to the Thai Bond Market Association (TBMA).

That supply is now falling back and, with institutional investors demanding high returns and top ratings, sellers of corporate bonds are focusing on retail investors, who want better returns than rock-bottom bank deposit rates but are less demanding than institutions.

The best example of this trend is the mammoth 30 billion baht bond being sold in July by Thailand's biggest listed company, oil and gas firm PTT PCL PTT.BK, which is being marketed to retail customers, like many other bonds to be issued next month.

"The primary market is a bit quiet. There's not much new supply we can invest in over the next few weeks," said a fund manager at an asset management said.

"Since PTT's bonds also focus on the retail market, what we're doing is seeking top-tier bonds in the secondary market."

Corporate spreads have generally narrowed in the past week.

The average spread for "AAA" bonds shorter than three years narrowed to 92 basis points from 98 basis points a week ago, while the average spread for "AA" bonds tightened 3 basis points and that on "BBB" bonds narrowed about 2 basis points.

However, the average spread for "AAA" paper longer than five years widened slightly by 0.6 basis point to 150.7 basis points last week.

Lower-rated bonds often sell to retail investors; some fund houses can only invest in bonds with a rating higher than "A", and many fund managers are particularly wary right now, with falling company profits increasing credit risk.

However, as with "AAA"-rated PTT, bond underwriters said pricing was another factor. A top-tier five-year bond might have to offer about 150 basis points over government bonds to funds, but it could get away with 120 basis points for retail buyers.

"Issuers can get better absolute returns when offering bonds to retail buyers," said Pornthep Panyarachun, senior vice president at Siam Commercial Bank SCB.BK.

"The retail market is big enough to absorb large supply, even though the government plans to launch its saving bonds the same month as PTT," he added.

The government is selling at least 50 billion baht in savings bonds to retail buyers in July as part of its effort to raise funds for economic stimulus measures. [ID:nBKK230149]

The TBMA is expected to raise its forecast for new bond issues this year from 250 billion baht, which compares with 280 billion baht in 2008.

There appears to be enough liquidity in the banking system to absorb this supply. Kasikorn Research estimates there is 836 billion baht in excess liquidity -- deposits minus loans -- in the domestic banking system.

International institutions are returning to the market to tap some of that liquidity.

French state agency Agence Francaise de Developpement (AFD) has just issued 4 billion baht in bonds and Commonwealth Bank of Australia (CBA.AX) sold 4 billion baht in May, the first offering by a foreign borrower since September 2008. ($1=34.01 Baht) (Editing by Alan Raybould)