Wednesday, 26 June 2019

Frontier Markets Issue

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The Lao People’s Democratic Republic’s latest visit to the baht bond market was also its most complex, requiring a combination of determination and diplomacy to overcome regulatory hurdles.

The Bt11bn (US$309m) five-tranche issue, launched hours ahead of the US election on November 8, allowed Laos to retain access to a vital source of funding despite a rule change that threatened to block it from using the proceeds at home.

With no developed domestic capital market and an economy too small to justify a US dollar fundraising, Laos had turned to neighbouring Thailand over the last three years to raise funds for its economic development programmes.

That option, however, came under threat earlier this year when Thailand’s Ministry of Finance imposed a new condition preventing foreign issuers from using the proceeds of baht bond issues overseas.

As a result, Laos had to structure the deal such that the proceeds stayed onshore but still gave it the access to funds for its home needs. Working with the Bank of Thailand, the Securities and Exchange Commission and the Thai MoF, it took a few months to hammer out a workable structure.

Laos would borrow short-dated loans, denominated in US dollars to match some immediate funding needs, from Thai commercial banks for use across the borders. It would then repay these bank loans with proceeds from the bond issue, thus keeping the funds onshore and meeting the MoF rule.

The structure worked to the sovereign’s advantage, allowing it to borrow more in dollars from the bank market than it could through a bond issue. Laos had sold dollar bonds in Thailand in December 2015, raising US$182m, a modest sum compared with the US$314m-equivalent from the most recent Bt11bn issue.

The latest bond, rated BBB+ by Tris, received a warm reception with a 1.5x oversubscription, and met the target of diversifying the investor base to include more high-net-worth investors, as more than 60% of the issue was allocated to them.

Although the structure was slightly more complex than previous issues, the overall cost to Laos still remained competitive. The healthy demand tightened final pricing, particularly in the short tenors which were fixed close to the tight ends of the ranges.

The Bt4.8bn three-year paid 3.76%, the Bt1.867bn five-year paid 4.1%, the Bt1.062bn seven-year paid 4.55%, the Bt1.37bn 10-year yielded 4.975% and the Bt1.9bn 12-year yielded 5.15%.

Bank of Ayudhya, Kasikornbank and Siam Commercial Bank were joint bookrunners, as well as joint lead arrangers with Krung Thai Bank and Thanachart Bank. Twin Pine Group was financial adviser.

To see the digital version of this report, please click here

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