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Thursday, 19 April 2018

Domestic Bond

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The first project bond from a foreign issuer in the Thai baht market opened the door to an alternative source of infrastructure finance and enhanced Thailand’s status as the regional funding hub for Indochina.

Nam Ngum 2 Power, which owns and operates a 615MW hydropower project in Laos, launched its maiden Bt6bn (US$184m) bond in September. The timing and structure hit a sweet spot with yield-hungry investors, and locked in low rates for the borrower at a time when benchmark yields were heading back towards 2016’s multi-year lows.

The Bt1bn three-year tranche pays 2.59%, a Bt1.4bn seven-year pays 3.48% and a Bt3.6bn amortising 10-year tranche pays 3.69%.

For years, hydropower producers in Laos had sought to pry open the bond markets in Thailand in search of an alternative to the expensive bank loans typically used to fund infrastructure projects.

In 2006, the Laos government had explored funding the Nam Ngum 2 power project with bonds of up to Bt1.5bn backed by the Export-Import Bank of Thailand but nothing materialised. In 2014, Nam Theun 2 Power looked into a refinancing package that included a bond offering in Thailand, but investors gave it the cold shoulder.

Nam Ngum 2 timed it right, proving that Thai institutional investors can accept complex infrastructure risk from a frontier market.

In May, the sponsors of Nam Ngum 2 began talks with joint lead managers Bangkok Bank, Krungthai Bank and Siam Commercial Bank to refinance its baht-denominated bank loans with a goal of reducing interest-rate fluctuation risks and achieving cost savings.

Thai investors were hungry for yield and were looking to diversify, but institutional investors were also very selective. A corporate rating of A for Nam Ngum 2 from Tris Rating, with a A– rating for the project bonds to reflect the subordination to secured bank loans, overcame that issue.

Investors were attracted by the project’s solid track record, the strong financial profile of sponsors CH Karnchang of Thailand, Ratchaburi Electricity Generating Holding of Thailand and EDL-Generation of Laos, and – most importantly – the offtaker’s strong credit, in this case the Electricity Generating Authority of Thailand, rated AAA by Tris.

The spread also looked attractive to Thai investors. For example, the 3.48% seven-year tranche paid almost 75bp more than the Siam Cement 2024s, rated A.

The 10-year tranche amortises from year eight to reduce refinancing risks – a rare feature in Thailand’s domestic bond market – but that did not faze investors. The Bt6bn issue was more than 3x covered overall, and the 10-year tranche more than 5x subscribed.

Nam Ngum 2’s refinancing set a precedent and has already convinced Nam Theun 2 Power to revive its plans to refinance its bank loans with a Thai bond.

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