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Friday, 19 April 2019

Signs of progress for credit guarantee fund

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An ADB-led initiative to deepen Asia’s local bond markets looked to be back on track in April after Thai investors expressed early interest in a baht deal from commodity trader Noble Group.

Singapore-listed Noble, which has raised funding in US dollars, Singapore dollars and ringgit, is planning a debut in the baht market with a guarantee from the ADB-backed Credit Guarantee and Investment Facility.

The credit enhancement fund had pledged support for a Singapore dollar bond from Thai Union Frozen last June via HSBC. However, the deal never took off, with market participants suggesting that, even with the CGIF guarantee, Thai Union still could not beat its local cost of funding.

Thai investors, however, seem more amenable to the structure, raising hopes for a successful deal this time around.

“We will regard it as a supranational deal, since it is related to ADB, and it has a local AAA rating from Fitch,” said one Bangkok-based investor. “However, it all depends on pricing, whether or not it will be attractive enough, we’ve had no indications on that yet.”

The CGIF aims to encourage local investors to look at credits beyond their own borders in order to deepen Asia’s bond markets, while offering low investment-grade rated issuers an alternative to US dollar funding.

Noble, in this case, gets to diversify its funding sources at a manageable cost, earning an AAA (Thai) rating versus its international Triple B. If the deal materialises – and all indications at the time of writing were positive – it will provide a solution for other Triple B issuers to tap Asia’s more liquid local markets.

The CGIF is structured as an ADB trust with a US$700m pool, and ASEAN+3 as contributors. This group comprises Brunei, Cambodia, Laos, Indonesia, Malaysia, Myanmar, Singapore, the Philippines, Thailand and Vietnam, while the biggest contributors to the trust are the ADB, China, Japan and South Korea.

Under the CGIF guarantee, a bondholder representative can demand payment from the CGIF only upon a non-payment event under the bonds, rather than on a cross-default. Bondholders have the right to accelerate payment upon any other event of default, but when this happens, “CGIF will no longer be obligated to make payments under the guarantee”, according to a Fitch rating note.

The idea behind the CGIF is to strengthen financial stability in the region, and make its financial markets more resilient to volatile global capital flows – an issue that is becoming more relevant amid a surge in US dollar debt offerings from Asia.

A CGIF issue in the baht markets will also boost Thailand’s international standing. Thai officials are hopeful that such an issue will bring more foreign credits to its shores, and boost its chances for a rating upgrade to Double A territory.

Noble held a roadshow in Bangkok in early April via joint leads HSBC and TMB Bank. The timing and issue details will depend on investors’ response and market conditions. As this will be Noble’s debut in the local market, investors need time to get familiar with the credit, and also study the CGIF structure.

The company plans to issue up to US$100m-equivalent, about Bt3bn, just short of the Bt3.5bn for which it won approval in the nine-month period to end-September. The relatively small size indicated that the issue was likely to be placed privately.

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

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