Investment News

Devonshire Capital
May 2005

Thailand gets creative in infrastructure projects.
Securitisation issues are covered in bits of legal sticky tape – it is workable but it is cumbersome,” Mr Hughes says.
FINANCIAL TIMES

Published: May 22 2005
By William Barnes in Bangkok

Securitisation is becoming the new buzzword of Thailand’s financial industry. In fact, analysts believe Prime Minister Thaksin Shinawatra sees it as a relatively painless way of helping fund his $40bn infrastructure programme.
According to Mr Thaksin, Thailand’s entry into the top league of Asian economies depends on big spending on infrastructure, including public transport, shipping ports, energy and irrigation. But the government has committed itself to reducing public debt from 47 per cent of gross domestic product to 40 per cent in an effort to balance the budget.
Hence the appeal of asset securitisation, which involves selling the rights to future income streams of projects such as toll roads. It is a form of debt that does not necessarily appear on the balance sheets.

The government recently took the plunge by allowing a consortium, including Bangkok Bank and HSBC Group, to run the country’s first state securitisation, worth $500m. The proceeds of this will be used to build a complex of offices for civil service agencies on Chaeng Wattana Road in Bangkok.
“We may have entered a new era of Thai finance,” says Nattapol Chavalitcheevin, president of the Thai Bond Dealing Centre, the country’s fixed income exchange. “The government is going to make the running and the private sector should follow with its own issues later.”

Advocates of securitisation believe it could unleash a flurry of business activity and become a driving force in the economy at a time when the economic outlook is worsening and consumer spending is slowing.

While the government has pointed the way, the practicalities of issuing asset-backed securities remain challenging, says one Bangkok-based adviser to the government. “Everything is still sketchy,” he says. “It [the growth in securitisation] is going to happen but we are going to have some fun on the way.”

Details on the Chaeng Wattana project have yet to be published but it is understood that bonds will be sold in three tranches with terms of 10 to 20 years. A special purpose vehicle will take a 99-year lease on the land from the government and develop the site. Rental income from 28 civil service departments will be used to pay bondholders interest.

Unlike the foreign financial groups that were bidding for the deal, local banks have tended to show little interest in securitisation. This is largely because they are awash with cash, reflecting their recovery since the 1997-98 Asian financial crisis. They argue that a move into the securitisation business would only lead to further growth in their cash pile.

Until now, only the “brave and the desperate” have bothered to test the market, says Oliver Hughes, at Devonshire Capital, a UK merchant bank. There are a handful of small credit card or mortgage-backed issues by companies that have struggled to raise funds through other means.

Growth in the securitisation market has been held back by a number of legal and accounting wrinkles. For example, special purpose vehicles designed to issue asset-backed securities are classified as corporations, because financial trusts are illegal. These corporations have to pay tax on any surplus income passed back to the asset or project. “Securitisation issues are covered in bits of legal sticky tape – it is workable but it is cumbersome,” Mr Hughes says.

It does not help that many high-profile infrastructure projects are likely to be seen as government liabilities, even though they are securitised and thus theoretically off balance sheet.

Mr Nattapol says: “The Cheang Wattana deal locks in rents from the civil service, so investors should be happy. But what about an underground railway? Who knows how many passengers it will have? Surely investors will need some sort of government guarantee.”

Without easily predictable income flows, projects such as sky-trains, underground and toll roads might be difficult to securitise, although housing and energy schemes – where customers contract to make future payments – might be relatively straightforward.

In an effort to prevent a slowdown in its ambitious infrastructure programme, the government may decide to take on a growing amount of contingent liabilities – a move that will be closely monitored by international rating agencies.

Philippe Sachs, a credit analyst at Standard & Poor’s, believes the assessment of liabilities has to be based on the quality of infrastructure projects, many of which are seen as economic necessities. “In general, it is always better for a government to finance infrastructure rather than consumption,” Mr Sachs says. “That helps bolster growth prospects and perhaps solve bottlenecks in the economy.”

While the Cheang Wattana project will test Thailand’s ability to pull off a complex securitisation, much depends on investors’ demand for such a deal. “Structuring the thing will be a fine art,” says Treekwan Bunnag, a director at Trinity Securities, a Thai broker. “How much appetite will there be for long-term investments when interest rates are climbing?”

At the very least, the deal will create a benchmark for Baht-denominated asset-backed securities offers. It may also help increase awareness and interest among potential investors.

“It is a widely misunderstood concept,” Mr Hughes says. “You cannot use securitisation to turn rubbish into gold but in the right hands it is a powerful tool. We might be surprised how creative the government can be.”

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