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FRA sale threatens asset price collapse

 

Thanong Khanthong and Vatchara Charoonsantikul say the FRA auctions should be scrapped and transferred to the Asset Management Corporation if they threaten a collapse of Thai asset price.

Finance Minister Tarrin Nimmanahaeminda, who commands an oversight policy over the Financial Sector Restructuring Authority (FRA), is advised to scrap the Bt371 billion (about US$11 billion) grand sale of the business loans of the 56 defunct finance companies if it emerges that the 12 bids submitted Tuesday by local and international bidders are part of a collusion. If the bid prices are so low as to trigger further asset collapse in the Thai economy, it is even more justified to terminate the auctions and transfer the business loans from the FRA to the government-controlled Asset Management Corporation (AMC), dubbed the ''bad bank''.

First, there are grounds to believe that most of the major bidders are participating in the world's largest one-day auction of the Thai assets for short-term speculative purposes rather than for long-term investment. If so, this does not bode well for the economic recovery. Earlier Tarrin, who realises that the auction is closely watched by the international financial markets and is a test of Thailand's credibility in handling the restructuring of the financial sector, hinted that if bid collusion is rampant, the FRA is entitled to scrap the auctions. Obviously, the FRA auctions are weighing heavily in his mind.

Some good number of debtors of the 56 defunct finance companies have already agreed in advance with the bidders to pay them a profit margin if they win the bids and offer them a buy-back deal. Morally, this kind of arrangement is unacceptable because eventually the Thai taxpayers will have to shoulder any unrecovered money, out of more than Bt500 billion owed by the 56 defunct finance companies to the Financial Institution Development Fund.

Of all the business loans, 71 per cent are non-performing, with missed payments for 12 months or more. If the three-month standard of missed payments is applied, the NPLs are 97 per cent. This indicates that some of the debtors are the so called ''strategic NPLers'' or those who are still capable of servicing their debts but have elected not to do so on hopes that they can buy back their loans at sharp discounts.

It is reported that some bidders, such as GE Capital or Goldman Sachs (Asia) Finance, have designed three contracts to work on the debtors' behalf. In the first contract, the debtors contribute a pool of funds for them to bid for their debts. In the second contract, the bidders will sell back the debts to the debtors for a margin on top of the bid prices. In the third contract, debtors are required to put their money in an escrow account to make sure that they stick to the deals with the bidders.

If the debtors are willing to buy back their debts, why not let them negotiate directly with the AMC, originally formed last year as a bad bank to participate in the bidding of the bad assets and to shore up the floor prices? In this way, the prices of the debts will not be nailed below the floor through the bidding and the speculative bidders are denied to take home the handsome commission fees.

Second, the grand sale of the core assets of the 56 defunct finance companies will lead to a new benchmark of the Thai asset price. Dow Jones reported that offshore market talk on Monday was that the FRA could expect to get an average 30 cents on the dollar for the loans, down from more than 40 per cent it received in earlier auctions of the hire-purchase and housing loans. It further quoted Dr Supachai Panitchpakdi, the deputy prime minister and commerce minister, as saying that the market estimates of 30 cents on the dollar ''have been a bit on the low side.''

If the auctions fetch 30 cents on the dollar on an average, a new benchmark of the Thai assets will be created with adverse implications. Good and ongoing concerns such as hotels, hospitals or condos will not be able to compete against the assets that have been bid for, which will be able to undercut the pricing because their costs are lower. To give an example, a Bt100 million condominium project, which has a five-year return on investment and is charging its customers an average rental fee of Bt20,000 a month, will go out of business and become a problem loan if it confronts a neighbouring competitor, which is willing to charge the customers only Bt5,000 a month in rental fee, because the new owner has bought the asset from the FRA auction for Bt30 million. Other similar ongoing projects will be forced to lower their prices or have no bargaining power against their joint venture partners.

Third, the problem with the FRA's grouping of the Bt371 billion assets into 45 tranches is that the assets are not assigned a credit rating according to their true market value. They all are lumped together as a pool of junk assets. As a result, AAA rated assets are mixed with junk rated assets. If AAA rated assets are sold separately, they should have a better chance of fetching 80 to 90 cents on a dollar. Junk rated assets can even garner 10 cents on the dollar.

Fourth, successful bidders of these assets are likely to go after the debtors in earnest in order to recoup the money as much as possible. Because personal guarantee plays an integral part in every loan deal, Thai debtors will be squeezed by either the civil or bankruptcy lawsuits until they are personally bankrupt. This prospect is likely to lead to a second round of social bankruptcy in Thailand. There is no easy way out on this scenario.

The FRA is understood to have median prices in its mind in its grand auctions. If the bid prices are lower than what are anticipated, the FRA will cancel the auctions. If they meet the anticipations, the FRA will let go the assets. It will be interesting to see whether the FRA auctions will lead to a revitalising of the Thai economy or another round of national bankruptcy.

 

 

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