Apollo Investment Management 

Perfidious Thais

“What the central bank said was not what it meant... when it said all liabilities were fully guaranteed, it meant all liabilities except those liabilities...”
Cautionary tales may not be the most encouraging material to put on this website. Prospective investors of a nervous disposition are probably best advised to stick to short-dated government bonds. However, pick your government with care. Investors still undeterred, read on for an insight into the hazards and irritations of emerging market investment.

In December 1997, Thailand shut down fifty-six finance companies, and announced that all others were solvent. Five months later another seven were in trouble, and the Bank of Thailand (BOT) ordered their takeover by the Financial Institutions Development Fund (FIDF), to be followed by a merger with the state-owned Krungthai Thanakit (KTT). In the Bank of Thailand’s official Order, No. 25/1998, dated 18 May 1998 and posted in English on the BOT’s official website, it was stated that:

“The Bank of Thailand wishes to affirm that the above actions will not in any way affect the depositors or creditors of these finance companies as they will continue to operate normally. After the merger of each company into KTT, its depositors and creditors will be transferred to KTT...

“This will strengthen Thailand’s financial institution system and enhance its credibility with depositors and creditors, both local and foreign. The FIDF will continue to fully guarantee all depositors and creditors.”

One of these seven finance companies was Union Asia Finance (UAF), which had a convertible bond issue outstanding. On the strength of the guarantee announcement, I bought these bonds at 24 cents in the dollar. At this price, the running yield was 14% (in dollars); the yield to maturity was 38% (effectively in baht, but the baht by that stage appeared oversold), and an FIDF guarantee announced by the central bank seemed good enough to me. The treasurer of UAF, and a director newly appointed by the Bank of Thailand, provided further reassurances that the FIDF guarantee did indeed apply to these bonds.

A few weeks later the wriggling started. All liabilities would be covered except these liabilities (because they were subordinated) – although the announcement had made no mention of exclusions or qualifications. What the Bank of Thailand had said was not what it meant. And so on – when comments were forthcoming at all, since most communications, representations, and requests for meetings went unanswered.

The December coupon date came and went, with no payment and no communication. The bonds by year-end were written down to the bid price, 1 cent in the dollar (so the fund’s reasonably satisfactory performance in 1998 was despite this disaster).

Suddenly in January 1999 a restructuring proposal was unveiled, with an enormous haircut for the bondholders. By this stage, communication was much better than no communication, so the bonds rebounded modestly, to reflect the preliminary offer, and the expectation of a compromise settlement.

Bondholders replied, but have yet to receive any response. Meanwhile the Stock Exchange of Thailand, extraordinarily, announced simultaneously on 18 February the establishment of a committee on good corporate governance, and the “finding” that most of UAF’s assets had been transferred out of the company by 1 February!

This flagrant disregard for due process, backtracking on formal commitments to international investors, and evasion by non-response, fit uneasily with the desire of foreign investors to believe in a competent team of reformist technocrats transforming Thailand.

It demonstrates the weakness of a prospectus which is governed by English law, when the assets are in Thailand and judgments may not be enforceable.

And it highlights the dangers of relying on governments.  The new BankThai will reportedly approach the international markets soon. Ask whether its assets were stolen. Caveat investor. 

Claire Barnes, 3 March 1999

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