Bangchak's leap of faith is rewarded

June 8, 2000

SOMETIMES in the bond market, it pays to follow your gut-feelings.

That's what Bangchak Petroleum Plc president Sirichai Sakornrattanakul must have felt at the critical stage on Tuesday when it emerged that two of his company's bond issues, worth a combined Bt4.6 billion, had been oversubscribed by four times, reflecting enthusiastic interest from local institutional investors.

Bangchak Petroleum had jumped into the market on faith, placing a one-year tranche worth Bt1 billion and a three-year tranche worth Bt3.6 billion with investors.

"I really felt relieved," Sirichai said, in response to the big vote of confidence. "When we told the Finance Ministry that we would try to sell the bonds by ourselves, we did so on a gut reaction. We could not have foreseen that it would be this successful."

The drama began late last month, when the Cabinet approved a plan for Bangchak Petroleum to issue the two tranches of bond, backed with a guarantee from the Finance Ministry. The proceeds would be used to retire the oil company's foreign debt of US$130 million (Bt5.5 billion) due for repayment within this month.

It wasn't exactly the best of times to enter the bond market. The Export and Import Bank of Thailand was about to launch its bond issue worth about Bt5 billion. The Electricity Generating Authority of Thailand was also pondering what to do with the remainder of its previous bond issue. And the Industrial Finance Corporation of Thailand was trying to push out its own issue.

Nonetheless, Sirichai and his aides began working the phones on Tuesday last week, soliciting interest from potential subscribers from banks, mutual funds, insurance companies and cooperative funds. They did so without any help from the bond underwriters. It was not until this Tuesday, a week later, that the book-building was closed.

All told, 22 investors submitted their bids for the one-year bond, compared with 21 investors for the three-year bond. Some 30 investors submitted their bids for both tranches.

The Dutch auction system was used, allowing bidders wishing to snap up the bond to get the same pricing. "We were aiming to fetch a pricing of some 15 to 20 basis points above the government bond yields. But some people in the market had warned that we might be lucky to get 50 basis points, 70 or at least 100 basis points above the government bond yields," said Sirichai.

The one-year bond started its bid price at 3.15 per cent before going up five basis points at each interval, to 3.35 per cent. It ended up fetching a yield of 3.15 per cent, compared with the government bond yield of about 3.03 per cent.

"It was a very good yield that we fetched," said Sirichai.

As for the three-year bond, the interest yields were much higher due to the risk premium. Again, Bangchak Petroleum set its bid range at between 4.60 per cent and 4.80 per cent, against the equivalent three-year government bond yield at 4.50-4.54 per cent.

Sirichai said the company expected to get 4.70 to 4.80 per cent but it ended up fetching 4.52 per cent-another big success.

After securing the proceeds from the two bond issues, Bangchak Petroleum will clean up its burdensome foreign debt as a first step to beginning a new life.

The company is off to a good start: by going to the market on its own, it saved underwriting fees and high interest costs from foreign debt, not to mention the exchange risk with the pressure of higher US rates.

BY THANONG KHANTHONG