DEBT CAPITAL MARKET

Capital market
1. Equity capital market
a. Market for selling and buying equity securities
i. Equity = ownership interest
1. Entitle for both A and I of company
2. Infinite investment
3. Variable cash flow
2. Debt capital market
a. Debt security = money that is borrowed and must be repaid
i. Stipulate size of the loan, interest rate and maturity
ii. Interest rate is lower than borrowing money from bank as it cut-off
middle-man
1. However, company must be large and good credit enough
3. Cost of capital for debt and equity security is arguable
a. For junk bond, debt cost > equity cost
Bond
 Most common type of debt securities
o Between issuer and bondholder
 Pay coupon payment and repay principal [face value] at maturity date

o
o Why bank issue a lot of loan
 Matching maturity  lend short = borrow long


 There are 2 type of market
o Primary market – more important: use to raise fund
 LT corporate bond issue at par
 ST corporate bond [less than 270 days] issue at zero coupon rate = sold at
discount
 Longer the duration, steeper the curve

o
o Secondary market – use to provide better price discovery for next bond
 Traded over the counter organized by bond electronic exchange [BEX]

o
 Who are the issuers?
o Government
 MOF – government bill/bond + saving bond
 Issue to finance fiscal project
 BOT [BOT bill/bond]
 Issue to finance monetary policy
 SOEs [state owned enterprise]
 Finance profitable project – flexibility
 Type of government bond
 LB [loan bond]
 
SB [saving bond]: sold to retail investors instead of institutional
investors
 ILB: inflation-linked bond
 TIPs: treasury-inflation protected securities
o Corporate – finance profitable project
 Listed
 Non-listed
o Foreign
 Government bond – sovereign bond
 Corporate
 THAIBMA symbol

o
 Breakdown
 Issuer
 Maturity year
 Maturity month
 Tranches  A, B, C, D
o Same maturity month but different series
 Rational to issue bonds for corporate
o Attractive source of funding
 Usually cheaper than bank loan
 Interest is tax-deductible expense
 Non-diluting: ownership %
 Non-amortization: no leveraging [goes to finance cost]
 Clean: need no collateral
o Alternative source of fund
o Gain access to broader investor’s base
o Public relations


 Who are the investors?

o II: institutional investors
 Asset management: mange fund; trading  need liquidity; corporate bond
has high liquidity
 Life insurance: invest in LT bond; matching maturity
 NL insurance: 2-3 years bond
 Banks: mange their own books [trading desk]
 Because of interest rate risk hedging
 Government pension fund/ social security office fund: match maturity by
3-5 years bond
o High net worth investors [HNW] and other retail investors
 Co-ops
 Corporate
 High net worth individual
o Retail investors
Risk and term structure of interest rate
 Required Yield = risk free rate + risk premium
o Risk free rate driver – interest rate risk: most drive the price of the bond
 Inflation
 Focus on headline inflation to market bond NAV
o It is telling people purchasing power
o Demand and supply shift driver
 Demand
 Rising in income
 Demand shock
 Seasonality
 Supply
 Rising in minimum wages
 Supply shock
 We prefer controllable inflation rate
 Monetary policy
 BOT monetary operation
o Policy rate + overnight rate
o BOT bond issuance/ purchase or sale debt securities
o Reserve requirement
o Foreign exchange swap
 Manipulate FX rate by exchanging 2 currency in ST
o Standing deposit and lending facility  last resort for
commercial banking
 Policy rate  changes in 50 basic point
 Fiscal policy
 Fed policy
 Movement in US treasury curve
 Geographic risk
o Fund flow movement to Thailand as different of real
inflation rate
 External factor
 THB fluctuation; THB up  fund flow up  Y down
o Current account surplus
o Different interest rate surplus
o Financing account surplus
o Risk premium
 Credit risk
  Credit rating  BBB above is investment grade, below BBB- is
junk bond
 Rating outlook: stable, positive, negative, developing
 Liquidity risk
 High liquidity  lower Yield
 Reinvestment risk
 Callable bond
 Exchange rate risk
 Appreciate in THB
 Event risk
 Corona virus
 Yield curve is generally upward sloping but in case of economic downturn, it can create
inverted yield curve
 Inflation announcement has 1-month lag from calculation to announcement
Bond issuance process

1. Legal counsel: consulting for securitization  Phatra

2. ThaiBMA: registration, mark to market price NAV
3. SEC: govern the bond issuance
4. Investor: low liquidity  sell mainly to institute then break it down for retail investor
5. Bank take record + distribute bond to investors
6. Bondholder’s representative: a must on behalf of retail investor
a. Check on default risk
7. Credit rating agency
a. Third party evaluate periodically
b. Due diligent
  Underwriter
o Firm commitment
 Agree to assume all inventory risk and purchase all securities directly
from issuer for sale
 Force to purchase unsubscribed portion
o Best effort
 Most in market is best effort
 Placement types
o Private placement  most in Thailand are PP and PP II
 PP: small group
 Not more than 10 investors in 4 months
 PP: II
 Institute investor [26 types]
 PP: II & HNW
o Public offering
 Less likely to be
Bond pricing in primary market
 Primary market
o Issue at par
o At issue date, the coupon of bond is set at required return
 Secondary market
o Required return used to discount cash flow to NPV  mark to market NAV
  Factor affecting bond pricing
o Benchmarks
 Government bond yield
 Credit spread
 Tenor/ Duration  Duration up  yield up
o Issue size  supply up  price down  yield up to compensate and incentivize
demand
o Investor appetite
o Frequency and consistency of issuance
 New issuer  increase in spread [risk premium]
o Market timing
o Alternative investment product
 Book-building process
o Objective: try to find the right price to hit enough demand for client’s supply
expectation
Variation in bond structure
 Secured type
o Secured by issuer’s asset
 FA
 Financial asset
o Secured by guarantor
 Related person
 Parent [downstream guarantee]
 Subsidiary [upstream guarantee]
 Related company
 Credit guarantee facility – banks
o Securitization
 Asset-backed securities
 Mortgage-backed securities
 Collateralized debt obligation
 Catastrophe bond
 Principal repayment
o Bullet payment [repay once in full at maturity]
o Amortizing payment
 Fully amortizing
 Partially amortizing with balloon
 Coupon
o Type of coupon payment
 Fixed rate
 Step-up
 Floating rate
 Index-linked
o Frequency
 Monthly, quarterly, semi-annually
 Zero-coupon
o Coupon deferral
  No
 Cumulative
 Non-cumulative
 Embedded option

o
 Covenant
o Financial
 D/E
 IBD/E  interest bearing debt/E
o Non-financial
 Positive covenant: promise to do
 Negative covenant: Promise not to do
