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SCMP Reporter

SIAM Fortune, a listed Thai real estate firm, says in a report to the stock exchange it will issue up to six billion baht (about HK$1.81 billion) in debentures as part of a major restructuring.

     The restructuring was triggered by the recent withdrawal of the Charoen Pokphand Group as shareholder, the company said yesterday.

     Siam Fortune is the latest in a growing number of real estate firms to reach out to the debt market.

   The trend began earlier this year as domestic and foreign interest rate differentials grew, making it much cheaper for firms to borrow overseas.

     The legal mechanisms for overseas equity-linked bond issues were not in place until May last year when the Securities and Exchange Commission (SEC) Act was passed.

  Until then, Thai firms basically had a choice between borrowing from banks or issuing stock.

  Since March, when Land and Houses became the first Thai firm to issue a Euro-convertible debenture (ECD), more than 30 companies have either issued the instruments or set out plans to do so.

   Combined, Thai ECDs could exceed US$3.5 billion by the middle of next year. About half that amount will be by property firms.

  ''The most important point is interest savings,'' said Adisorn Thananannarapool, executive vice-president of Land and Houses.

   ''The nature of our business requires high borrowing up front to start a project. Any kind of interest savings goes straight to the balance sheet,'' he said.

  A Euro-convertible bond usually involves a dollar-based bond issuance in which the buyers have the option to convert their bond into shares of common stock, generally within 10 years.

   Because of that option, the issuing company borrows at a lower interest rate.

   The conversion price of the shares generally has a 10 to 25 per cent premium on the share price on the date of issue.

  ''Euro-convertibles weren't done immediately after the SEC Act passed because people here didn't understand them,'' said Peter Schiefelbein, managing director of Standard Chartered Securities Asia in Bangkok.

  ''The first issues got poor rates, but they'll come back and do some more,'' he said.

  Standard Chartered served as adviser for a recent ECD issue by Somprasong Land Development Co in which the coupon rate was less than four per cent, about half what the company could have obtained on a bank loan in Thailand.

  Next year the company's interest savings would be almost as large as the company's profits this year, according to Ajay Amar, finance manager for Somprasong.

  ''A lot of money has been freed up, money we can use to build up our land bank,'' he said.

  Chavarat Charnvirakul, managing director of Sino-Thai Engineering and Construction, a listed property developer that recently completed an ECD issue, said without the convertible option as ''the sweetener'', foreign investors might be reluctant to put their money with a Thai firm.

  ''For most US and European investors, Thailand is still an unknown entity,'' he said.

   ''The convertible is an attractive instrument,'' he said.

  The chance for real estate companies to access cheaper funds was perhaps the single greatest change in the industry over the past few years, said Paul Scales, managing director for Jones Lang Wootton, an international property consulting firm.

  ''Reducing these companies' costs of funds and improving their earnings gives them outstanding opportunities to expand their businesses by investing for the future,'' Mr Scales said.

  There is a downside, however, in that the ECD option is limited to large companies since the debt instrument is seldom issued in amounts less than US$50 million.

  ''Rationalisation is under way in the Thai property sector,'' said Peter Schiefelbein, managing director of Standard Chartered Securities Asia in Bangkok.

  ''In the past, the property market was traditionally dominated by the small players, but they don't have access to the cheaper funds,'' he said.

  Another negative is pricing the bonds too cheaply.

   The earliest issues by companies such as Land and Houses, Hemaraj Land and Development Co and MDX Co, an industrial real estate developer, were offered with conversion prices that were quickly exceeded during the recent stock market surge.

  ''Essentially, the Thai ECDs have been equity plays, not debt instruments,'' says Douglas Logan, managing director for the investment bank Lippo Asia (Thailand).

  ''When you get a 10-year option to buy at a 10 per cent premium at today's price, it's a no-brainer for the investor,'' he said.

  That does not mean the conversion always takes place, although issuing companies normally do not plan to pay off the bonds when they mature.

   Many Japanese companies are now redeeming convertible bonds issued in the 1908s, at the peak of the bubble market.

  While the ECD boom has played a major role in boosting the balance sheets of real estate firms, it has also had a huge impact on the broader stock market since the money raised is usually repatriated.

  ''The Euro-convertibles have provided lots of liquidity into the Thai money market, and that money is being shifted into mutual funds,'' said Eamonn McConnell, managing director of Thai Asia Mutual Fund Co.

  ''The Euros have a lot to do with the stock rally that's been going on,'' he said.

  Since October 1, the stock exchange's composite index has increased more than 70 per cent.



Thai real estate firms tap debt market