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The Lao People’s Democratic Republic is to return to the Thai bond market for a third time, extending its sovereign yield curve and setting the pace for more South-East Asian issuers to raise funds in baht.
Laos will open on Monday a three-day subscription to a Bt6bn (US$185m) three-tranche issue, its largest on record. It also includes a seven-year tranche, the sovereign’s longest-dated paper to build out its benchmark yield curve.
The offering comes just as the Thai regulatory agencies are finalising plans to encourage more issuance in Thailand from sovereigns and corporations in frontier markets of Cambodia, Laos, Myanmar and Vietnam.
The Thai Public Debt Management Office is believed to be encouraging foreign issuers from to seek local Thai ratings, and is looking at various options to help credits to gain investment-grade ratings of at least BBB– from local ratings agencies Tris and Fitch.
The Asian Development Bank’s Credit Guarantee and Investment Facility could be one of these sources. Singapore-based Noble Group used a CGIF guarantee to obtain a local AAA rating from Fitch for its Bt2.85bn three-year bond in April last year, a move that other corporate issuers could emulate as ADB and South-East Asian countries work towards an integrated ASEAN economc community.
Ratings will help expand the Thai institutional investor base as some investor houses are unable to buy unrated bonds. The Ministry of Finance of the Lao PDR obtained a waiver on the rating requirement from the Thai Government, but the lack of a rating narrowed the investor base for the country’s baht bonds to mainly high-net worth investors.
There is growing interest in the neighbouring countries as Thailand switches from a low-cost manufacturing base to a high-tech one and companies move low-cost labour-intensive activities into Laos and Cambodia, creating an economic synergy among the countries.
Thai companies are also keen to move into the growing economies of Myanmar and Vietnam. That generates a natural need for baht-denominated funds. The Thai baht is also used as legal tender in Laos.
The latest bond from Laos will pry open the door to corporate issuers from Laos, in particular hydropower producers, which sell electricity to state-owned Egat and are exploring the possibilities of raising funds in Thailand to refinance project bank loans.
“The baht bond market has a role to play in meeting the funding needs of borrowers in the CMLV region,” said Adisorn V Singhsacha, founding partner and managing director of Twin Pine Consulting, referring to Cambodia, Myanmar, Laos and Vietnam. Twin Pine advised the Laos Government on all three of its bond issues in Thailand.
Sovereign bonds from Laos have only been issued in the Thai bond market. The previous two issues, a Bt1.5bn 4.5% three-year bond in May last year and a Bt3bn dual-tranche bond last November, found healthy appetite among Thai high-net worth investors.
However, there is negligible loose paper available in the secondary markets as the high-net worth investors typically buy and hold.
There is still good demand for the Laos paper, prompting the sovereign to emerge again. It priced a three-year bond to yield 4.76%, a five-year to yield 5.2% and a seven-year to yield 5.5%.
To ensure the larger size is achieved, issuer Ministry of Finance of the Lao PDR mandated six joint lead managers, namely sole bookrunner Bank of Ayudhya, Bangkok Bank, Kasikornbank, Krung Thai Bank, Standard Chartered and Thanachart Bank.
Proceeds from the bonds, which will settle on October 10, will be used for the government’s financial budget and for projects that will have positive economic returns. Laos is likely to swap the proceeds into US dollars for its hard currency obligations, as it did for the previous two deals.