November 13, 2014 / 8:47 AM / in 5 years

Thailand readies first bond swap after debt surges

* Govt looks to stretch maturities, simplify yield curve

* More active debt management may reduce borrowing costs

* Public debt has risen sharply since 2011

By Kit Yin Boey

SINGAPORE, Nov 13 (IFR) - The Kingdom of Thailand is set to embark on its first bond exchange, in a move that promises to deepen the local debt market and help the government reduce its funding costs.

Swapping thinly traded bonds for bigger and more liquid issues is the Public Debt Management Office’s latest step to broaden the appeal of Thai government bonds, following the introduction of inflation-linked securities and retail-targeted bonds in recent years.

“The PDMO is a very strong institution, and has been very active in managing the country’s debt,” said Moody’s senior analyst and vice president Steffen Dyck.

“According to PDMO, the switching exercise will allow investors to improve their portfolio and, at the same time, increase liquidity in the secondary market. We see this as part of ongoing debt management.”

The PDMO has been churning out innovative ways to diversify its funding options. Since 2007, it has introduced inflation linkers, amoritising bonds, step-up savings bonds and has extended its benchmark yield curve to 50 years. The government is now mulling a century bond to lengthen its yield curve further, according to bankers familiar with the plans.

The PDMO aims to reduce refinancing risks and improve liquidity, as well as allowing the government to manage its funding as efficiently as possible.

Thailand ramped up bond sales in 2012 to fund reconstruction and water management projects following widespread flooding, and government finances have also come under pressure from populist policies under Yingluck Shinawatra’s government, including a controversial rice subsidy that cost the country billions of dollars.

Including government and corporate bonds, outstanding public debt amounted to Bt5.58trn (US$170bn) as of April 2014, equal to over 46% of the country’s GDP. This was a sharp increase from September 2011 when public debt stood at Bt4.44trn or 41.7% of GDP.


A more reliable domestic yield curve may also boost the government’s standing ahead of a potential US dollar bond.

A global sovereign issue had been widely anticipated earlier this year, but was put off after the military took control of the country in the May 22 coup.

Since then, a more stable political backdrop has allowed Thai corporate issuers to lock in low borrowing costs in the international capital markets, raising hopes that the sovereign could return to the offshore market.

Similar liability management exercises have helped other governments, such as the Philippines, manage public funding more effectively. In Manila’s case, the introduction of liquid local benchmarks have helped drive down government borrowing costs, with a knock-on impact on the country’s international credit spreads.

Vietnam also included a switch in its latest global sovereign bond, taking out US$662m of higher coupon debt with last week’s US$1bn issue of 4.8% bonds due 2024.


Thailand’s liability management plans comprise two components - a bond switching programme and a bond consolidation programme.

Under the switching programme, which will be launched first, holders of Bt152bn of 3.625% bonds maturing in May 2015 are being encouraged to switch to a variety of longer notes. The destinations on offer are the 3.25% June 2017s , 5.625% January 2019s, the 3.65% December 2021s and 4.26% December 2037s .

The bond consolidation programme, which will kick off early next year, will encourage holders of various illiquid short-term paper to swap out for a single, more liquid and longer-dated bond.

A key idea behind the liability management plan is to keep it cash neutral: that is, no cash will be exchanged. In the past, investors would expect the PDMO to roll over maturing debt, but the agency would find itself with more funds than needed.

The PDMO, under the auspices of the Ministry of Finance, will complete the bond switching by end-November. A series of roadshows on October 28 was held with investors to explain the structure of the new programme.

“This will set the groundwork for future bond switches,” said a banker involved in the deal.

Bangkok Bank, Kasikornbank and Standard Chartered are mandated as joint lead managers for the bond switching and consolidation programmes, which cover an 18-month timeframe.


Pricing for the first switches will be decided after a bookbuilding exercise on November 25. PDMO decided to give investors more time for the first switch to study the mechanics. No pricing guidance has been provided for the switch as yet, but it will be a key issue for the investors.

One general effect of bond switches is that yield curves tend to steepen as supply for long-dated bonds tends to increase, but so far this has not happened in Thai government bonds.

“We have not seen any impact on yields yet from the bond switch announcement,” said Ariya Tiranaprakij, executive vice president of Thai Bond Market Association.

“Our first concern is if the PDMO has a huge amount of supplies which will affect yields, but the switch is unlikely to do that as yields are now falling from external factors.”

Subsequent bond switches, expected to be two to three more next year, will have a shorter period from announcement to bookbuilding. After August, the process is expected to be transferred to an electronic platform. (Reporting by Kit Yin Boey; Editing by Daniel Stanton and Steve Garton)

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