SCC banking on new debentures

August 10, 1999 -- SIAM Cement Plc (SCC), the country's largest construction conglomerate, is going after Thais with deep pockets in almost the same way local banks did earlier this year.

After the success of the first batch of its debentures, whose size had to be raised from Bt10 billion to Bt14 billion to meet demand from investors, SCC now looks more confident of its ability to raise cash directly from investors. It hopes that the second batch of debentures, totalling Bt10 billion, will continue to whet investors' appetite for relatively low-risk but high-yield investments during this time of market volatility.

Yesterday, SCC announced that it had fixed its 5.5-year debentures at 9.5 per cent, compared to 8 per cent for the 3.5-year debentures. The subscription period is between Aug 16 and Sept 30. The participating underwriters are Siam Commercial Bank, Thai Farmers Bank, Thai Military Bank, Siam City Bank, Deutsche Bank and Bank of Ayudhya.

When the company launched its first debentures in March, it mainly targeted institutional investors, for it did not expect there would be many rich Thais around with the minimum Bt10 million for investment. ''But as it turned out, there were a lot of individual Thais who were really rich but most of them did not know where to put their money,'' said Aviruth Wongbuddhapitak, SCC's vice president for finance and administration.

The Securities and Exchange Commission's (SEC) regulations remain tough for individual investment in corporate bonds or debentures. Unlike equities, in which anybody can invest any amount without limit, corporate bonds have to meet the stringent requirements of the SEC before they can be offered to individual investors.

The Thai authorities assume that corporate bonds are risky stuff, so any individuals wanting to invest in corporate bonds must be sufficiently well-informed. By placing a minimum requirement of individual investment in corporate bonds at Bt10 million, the authorities also assume that individual investors think hard before making decisions to subscribe to the bonds.

Banks that earlier raised money through so-called Slips or Caps (preferred shares and debentures) to avoid having to tap tier-1 capital support from the government's banking reform scheme, also faced initial problems over the Bt10-million minimum investment requirement. Yet they conveniently overcame the obstacle by having a mutual fund company subscribe to the Slips in bundles, before selling them off in smaller units of Bt1 million or Bt2 million each. But banks ended up having to pay the high yield of around 11.5 per cent, although they successfully converted part of their deposits into capital to strengthen their balance sheets.

SCC has its own reason for launching its debentures. This fund-raising exercise is part of the company's plan to mobilise Bt50 billion to retire its short-term foreign-currency debt exposure. By converting the foreign debt into domestic baht debt, the company is aiming to restructure its balance sheets, which will eventually bring down its foreign debt exposure to a more manageable level.

At the peak of the crisis, SCC owed foreign creditors about US$4.2 billion, most of which was unhedged. The foreign debts, some of which have been rolled over, have since been brought down to just over $3 billion. As a blue-chip company with strong connections, SCC has kept its reputation as a good debtor that has never defaulted on its interest payments.

To play it safe, it has also gone for a $700-million recapitalisation through equity, the first time it has done so in more than 20 years. This two-prong fund-raising strategy should improve the company's balance sheets as it moves ahead to downsize its operation by getting rid of non-core businesses.

Aviruth says Siam Cement is saddled with Bt45 billion in non-core businesses, which account for about 20 per cent of its total assets. Once these businesses, which must be sold as on-going concerns, are disposed of, the proceeds will be used to reduce the company's debts.

Capitalising on the low-interest rate environment and a relatively stable foreign exchange market, the SCC bonds, which are secured in the same class as the senior debts, will add to the supply of the underdeveloped Thai bond market.

The crisis in Thailand could in part be traced to the lack of a developed bond market, which otherwise would have deterred the lending explosion in the banking sector and prevented a mismatch in domestic funding. With most of the liquidity, largely short-term, tied to the banking sector, the economic system is more vulnerable to financial shocks.

''We also want to promote the capital market's development by having our bonds actively traded in the secondary market. We have talked it over with Siam Commercial Bank, asking this financial institution to maintain a portfolio and act as a market player for our bonds, so that whenever there is a demand to buy or sell it can be matched,'' added Aviruth.

By launching its debentures with interval maturities, SCC aims to have its bond supply constantly in the market. The first batch of the company's debentures has been well received by bond investors. Beginning at a par value of Bt1,000 per unit, they are presently traded at Bt1,010 for the floating debentures and Bt1,050 for the fixed rate debentures.