Market Support Programs
Thailand: Bond Stabilization Fund
Operational: SPV established: April 19, 2020 Firs
Purpose
To backstop companies that could not “fully rollover maturing corporate bonds” (BOT, MOF, and SEC 2020)
Key Terms
- Launch DatesAnnounced: March 22, 2020 Authorized: April 19, 2020
- Operational DateSPV established: April 19, 2020 First accepted applications: April 29, 2020
- End DateLast application to be accepted by December 31, 2022
- Legal AuthorityEmergency Decree B.E. 2563
- Source(s) of FundingOriginally public-sector enterprises, insurance providers, and the Thai Bankers Association; ultimately BOT
- AdministratorKrung Thai Asset Management
- Overall SizeTHB 400 billion
- Eligible Collateral (or Purchased Assets)Newly issued commercial paper
- Peak UtilizationNot used
Early in the COVID-19 crisis, non-financial businesses grew concerned that they would be unable to roll over their maturing bonds. To calm corporate debt markets, the Bank of Thailand (BOT) announced the Bond Stabilization Fund (BSF) on March 22, 2020. The BSF planned to purchase newly issued commercial paper from viable companies that could not roll over their maturing bonds. However, the program was not used. The BOT, seeking to avoid public criticism for directly supporting large corporations, imposed restrictions that made the program less attractive to borrowers. The main deterrent to participation was the requirement that borrowers must have already secured at least 50% of their funding needs from other sources. The BSF also charged a penalty rate that increased as its involvement increased. Last, participants could not, for the duration of the bond, buy back their stock, repay other debts early, pay bonuses, or distribute dividends. The BSF stopped accepting applications from participants at the end of 2022.
The economic uncertainty and panicked atmosphere of the COVID-19 crisis caused investors to sell corporate bonds to raise cash. The Bank of Thailand (BOT) worried about companies “that cannot fully rollover maturing corporate bonds” (BOT, MOF, and SEC 2020). The BOT deployed several measures to contain stress in financial markets. On March 22, 2020, the BOT announced the Bond Stabilization Fund (BSF) to purchase newly issued short-term debt (commercial paper) from investment-grade Thai issuers that faced difficulty rolling over long-term debt. On the same day, the government also announced a government-bond purchase program and a lending facility for mutual funds.
The BOT set up the BSF as a mutual fund owned by the BOT and managed by Krung Thai Asset Management, which was also owned by a subsidiary of the BOT. Investment-grade corporate bond issuers could apply to the BSF. Applicants presented the BSF’s investment manager with proof that they had secured financing from banks and corporate bond markets equivalent to at least half the value of their bonds maturing from 2020 to 2021. If accepted, the BSF would then buy commercial paper to fund the applicant’s redemption of its maturing bonds. The use of commercial paper insulated the BOT from the exposure that longer-term bonds could have created. It would also be easier for the BOT to wind down its involvement had signs of trouble emerged in participants’ finances. An emergency decree formally established the BSF on April 19, 2020, about a month after its announcement (Vajiralongkorn 2020). According to sources familiar with the BSF, the BOT was wary of the reputational damage and financial risk of lending to Thailand’s largest businesses. BOT lending had been controversial since the bailouts of dozens of finance companies in the Asian Financial Crisis saddled the Thai government with substantial losses and debt that was still outstanding in 2020. The BSF set onerous terms that reflected the BOT’s reluctance to enter the corporate debt market, as shown in Figure 1. To secure financing, an issuer’s bank loans and bond subscriptions must have each provided at least 20% of the funds needed, and at least 50% of the funding needs had to be first covered by private sources for issuers to access BSF. Issuers had the option of raising new capital from shareholders. The BSF also required participants to obtain commitments of financial support from their major creditor for the duration of BSF financing (BOT 2020). This approach relied on private creditors and investors to evaluate participants’ creditworthiness. BOT staff said it worked because of the unusually close relationships that Thai firms had with their banks. The BOT cited a lesson of Thailand’s recapitalization program from the Asian Financial Crisis for the choice to follow private market intelligence.
Figure 1: Funding Requirements for BSF Investment
Source: BOT 2020, 2.
The BSF also imposed behavioral restrictions on participants. During the term of BSF support, participants could not engage in stock buybacks, distribute dividends, or pay executives bonuses (BOT 2020, 6).
The original announcement set the BSF at THB 70 billion–THB 100 billion (USD 2.2 billion to USD 3.2 billion);FNUSD 1 = THB 31.5 during March 2020. it was later capped at THB 400 billion. However, as of October 2021, the BSF had not been used. News reports noted that many companies were able to roll over their existing debts rather than use the facility (Chudasri 2020). BOT said that firms applied to the BSF but ultimately received full funding from their banks, eliminating the need for the facility. The program’s formal end date was ambiguous: although the decree authorizing the facility required it to remain operational until 2025, the BSF did not accept debt that matured after December 31, 2022 (BOT 2020, 4).
As of publication, there has been no formal evaluation of the BSF either by the BOT or academics. BOT staff took the subsequent fall in corporate bond yields, depicted in Figure 2, as an indication of the program’s announcement effect. Shortly after the BOT released technical documents detailing the BSF, former BOT officials spoke against the facility; one said that the central bank “should not play a role as a banker for companies and judge which companies deserve assistance” (Polkuamdee, Banchongduang, and Chudasri 2020). Current staff also said that the purpose of the BSF was only to calm markets and that usage was not necessary. In its 2020 annual report, the BOT noted that although no businesses ultimately required assistance from the BSF, the measure succeeded at restoring market confidence and protecting financial stability (BOT 2021, 46).
Figure 2: Commercial Paper and Corporate Bond Index Rates
Sources: TBMA 2020a; TBMA 2020b.
Key Design Decisions
Purpose1
The Bank of Thailand, Ministry of Finance (MOF), and Securities and Exchange Commission (SEC) announced that the BSF’s purpose was to “invest” in eligible debt (BOT, MOF, and SEC 2020). However, the restrictive terms of the BSF limited the risks the BOT could take on and the pool of eligible participants. BOT staff had recognized that they were under public pressure to intervene in corporate debt markets, but they were reluctant to lend directly to large corporations. They did not want companies to use BOT funding too easily or unnecessarily. Their intention was, rather, to calm corporate debt markets and show that the BOT stood by as a liquidity backstop but did not support long-term borrowing.
Part of a Package1
The BSF was announced alongside two other programs to ease stress in markets. One program purchased government bonds, while the other provided liquidity to commercial banks that, in turn, invested in high-quality money market mutual funds.FNTen financial institutions borrowed from the mutual fund liquidity program during 2020, with total outstanding peaking at THB 56 billion (BOT 2021, 27). The government also announced a THB 500 billion program to lend to small- and medium-sized enterprises (SMEs), and a THB 100 billion fund to allow SMEs to defer debt payments at low interest rates for up to six months (Paweewun 2020). Earlier in March 2020, the BOT announced a cut to its main policy rate.
Legal Authority1
The King of Thailand issued an emergency decree on April 18, 2020, creating the BSF, specifying its organizational structure, and naming the BOT as sole shareholder. The BOT was not usually allowed to hold ownership stakes in corporations, with the exception of shares obtained as collateral (Bank of Thailand Act 2018, sec. 9).
Governance1
The Steering Committee (SC) was headed by the Permanent Secretary of the Ministry of Finance and included the BOT governor, the director generals of the Public Debt Management Office (PDMO) and Fiscal Policy Office, and three external experts (BOT 2020, 3). The SC supervised the Investment Committee (IC), guided investment and risk management, and selected Krung Thai Asset Management (KTAM) as the asset management company. The Investment Committee was headed by the BOT’s Deputy Governor of Monetary Stability and included one official each from the PDMO and Government Pension Fund, and two external experts. The IC formulated investment strategy according to the SC, soliciting any advisors for help (BOT 2020, 3).
Every month, the IC reported its performance to the SC. BSF governance also included an advisor, a trustee (Bangkok Bank), and an auditor (Ernst and Young, also known as EY) (BOT n.d.; BOT 2020, 3).
Administration1
The BSF retained Krung Thai Asset Management as its asset manager. KTAM carried out the investment strategy decided by the BSF’s two governing committees and monitored the outlook of the BSF’s investments (BOT 2020, 3). The BOT owned KTAM and its parent, Krung Thai Bank, through a subsidiary of the BOT known as the Financial Institutions Development Fund (SEC 2019).
Communication1
The BSF was announced on March 22, 2020, by a joint press release of the BOT, Securities and Exchange Commission, and Ministry of Finance. This press release said that the BSF’s purpose was “to invest in high-quality, newly issued bonds by corporates that cannot fully rollover maturing corporate bonds” (BOT, MOF, and SEC 2020). The press release did not position the BSF as a backstop to the market or mention the BOT’s reluctance to engage with corporate borrowers. Later, the BOT released the fund’s terms and conditions (BOT 2020). Krung Thai Asset Management also published technical circulars in Thai, such as questions and answers that mostly focused on how to calculate and document an issuer’s needs.
Disclosure1
KTAM was required to report the fund’s performance on its website on the first business day of each month (BOT 2020, 7).
SPV Involvement1
The emergency decree specified that the BSF would be a mutual fund incorporated to provide liquidity to private debtors and that the BOT would be its sole shareholder initially (Vajiralongkorn 2020, 2–3).
Program Size1
The March 22 press release said that the program would be THB 70–THB 100 billion. The April 18 emergency decree capped its size at THB 400 billion (Vajiralongkorn 2020, 3). That cap was 40% of Thailand’s annual commercial paper issuance, a similar amount of its annual corporate bond issuance, and about 10% of total outstanding corporate bonds.
To manage its exposure, the BSF limited individual investments to 3% of the fund for a single issuer and 10% of the fund for a single business conglomerate. Since the BSF set its fund size at THB 400 billion, those limits apparently would be THB 12 billion and THB 40 billion, respectively. The BSF also could not buy more than 10% of an issuer’s total financial liabilities.
Source(s) of Funding1
The BSF received THB 1 billion in start-up funding from the BOT. The emergency decree stipulated that any profits generated would flow to the Ministry of Finance. The Ministry of Finance would have indemnified the BOT up to THB 40 billion for any losses (Vajiralongkorn 2020, sec. 20).
When the BOT originally announced the BSF, it said that funding would come from two public financial corporations (the Government Savings Bank and Government Pension Fund), unnamed insurance companies, and the Thai Bankers’ Association, a professional association representing domestic banks (BOT, MOF, and SEC 2020). However, this plan was abandoned before implemented.
The BSF managed its liquidity by investing in savings accounts or other low-risk assets as chosen by the IC.
Eligible Institutions1
Participants in the BSF must have been illiquid but viable privately owned corporations. State-owned corporations and financial institutions and companies under the same group were not eligible. Applicants were required to specify a plan for future financing to prove viability after COVID-19 and demonstrate an investment-grade rating at least one month prior to their application to prove they were viable before COVID-19. If ratings agencies disagreed, the BOT used the lowest rating, further restricting the pool of eligible applicants. Applicants must also have been registered and operating in Thailand.
The BSF also required corporate borrowers to seek private funding before participating in the program. At least 20% of financing for a firm’s maturing bonds must have already been secured from banks, another 20% from further bond issuance. In total, the applicant must have secured at least 50% of its maturing bonds from private sources. If banks and bond issuers were unable to meet 50% of needs, then a firm’s ownership could inject capital to meet the difference. Figure 1 depicts these requirements. The firm’s major creditor, usually a bank, was required to send the BSF a letter committing it to support the company financially during the duration of the loan (BOT 2020, 4). This design relied on Thailand’s banks as institutions capable of and interested in evaluating a borrower’s creditworthiness. It also further removed the BSF and, by association, the BOT from deciding to which borrowers it would lend.
Auction or Standing Facility1
Firms must have applied for BSF liquidity no less than 45 days before the date their bonds matured, with all documents submitted no more than 15 days after the application date. The IC would then decide whether to support an applicant (BOT 2020, 8).
Loan or Purchase1
If the BSF were used, it would have purchased commercial paper directly from the issuers (BOT, MOF, and SEC 2020). It is unclear whether it would have held such debt to maturity or sold it in the secondary market.
Eligible Collateral or Assets1
The BSF’s English-language documents did not describe precisely which securities it would accept. Program documents mentioned investment-grade senior plain vanilla debt and non-subordinated bonds with tenor less than 270 days, which suggests that the BSF planned to purchase newly issued commercial paper, although the term is never used (BOT 2020, 4).
Participating companies could use the proceeds of the commercial paper and privately issued debt to pay off maturing bonds that they had issued before the BSF’s establishment on April 19, 2020, and that matured by December 31, 2022. They could not use the proceeds for any other purpose. If the private funding that a company received was secured, the BSF expected to receive similar collateral for its bonds. The BSF would not purchase debt intended to replace private-placement bonds (BOT 2020, 4).
The decree that created the BSF allowed it to purchase debt on the secondary market, though no other documents mention this feature (Vajiralongkorn 2020).
Loan Amounts (or Purchase Price)1
Successful applicants would have paid the BSF a base rate plus a facility premium. The base rate was equal to the maximum of the rate on its new bank loan and the rate on new bonds it issued on the market. The facility premium was equal to 100 basis points (bps) for short-term debt equivalent to 30% of the issuer’s funding needs and 200 bps for any amount exceeding 30% of the funding needs (BOT 2020, 5).
Haircuts1
No haircuts were applied because the BSF did not engage in lending.
Interest Rate1
The BSF did not specify interest rates because it did not engage in lending.
Fees1
No documents suggest that the BOT would have charged other fees to participants.
Term1
The BSF allowed participants to repay their debt before the indicated maturity date if they notified the BSF at least five days in advance (BOT 2020, 8).
Other Conditions1
BSF participants were prohibited from several activities and disbursements while the securities sold to the BSF remained outstanding. The BOT would enforce these conditions by requiring participants to submit reports to the BOT. The first condition was double-listed: participants could use BSF funds only to pay off existing maturing bonds and could not use funds to reduce capital. Participants could also not, during the term of the loan, engage in stock buybacks, repay non-BSF debt early, lend or pay dividends to shareholders, give bonuses to board members or the firm’s top two executives, or pledge assets as collateral for new loans (BOT 2020, 6).
Regulatory Relief1
No documents suggest that firms or lending banks would have received relief from capital or liquidity regulations because of participating in the BSF.
International Cooperation1
No such programs appear connected to the BSF.
Duration1
The BSF stopped accepting applications on December 31, 2022, the last date that eligible debt securities could mature. Its original plan allowed for an early end date if it counted THB 400 billion outstanding, limiting the BOT’s potential exposure (BOT 2020, 8). The decree that established the BSF allowed the facility to stay active for five years, but this duration was subject to an extension by Steering Committee vote. Had the BSF been used, the short maturities of the debt it purchased would have allowed it to wind down its exposure quickly rather than hold corporate bonds with maturities longer than a year.
Key Program Documents
(BOT, n.d.) Bank of Thailand (BOT). No date. “บริษัทหลักทรัพย์จัดการกองทุน กรุงไทย จำกัด (มหาชน).” Krung Thai Asset Management. Accessed September 2, 2021.
Web page in Thai listing technical details of the BSF.
(SEC 2019) Securities and Exchange Commission (SEC). April 3, 2019. “Company Profile - Krung Thai Bank Public Company Limited.”
Web pages showing ownership of Krung Thai Bank, the owner of KTAM.
Key Program Documents
(Bank of Thailand Act 2018) 2018. Bank of Thailand Act. B.E. 2485 (1942).
Legislation originally authorizing the FIDF, with amendments up to 2018.
(Vajiralongkorn 2020) Vajiralongkorn. April 19, 2020. “On the Maintenance of Stability of the Financial System and Economic Security of the Country.” Translated by Rachanichol Pakdeesettakul. Government Gazette, Emergency Decree B.E. 2563 137 (30a): 12–20.
Emergency decree establishing the BSF and specifying its organization.
Key Program Documents
(Chudasri 2020) Chudasri, Darana. June 4, 2020. “7 Listed Firms Extend Debenture Maturity.” Bangkok Post, sec. Business.
News article describing how banks extended corporations credit, avoiding the need for the BSF.
(Paweewun 2020) Paweewun, Oranan. April 8, 2020. “BoT Schemes to Cover 1.7m SMEs.” Bangkok Post, sec. Business.
News article describing other BOT programs to aid non-financial corporations during COVID-19.
(Polkuamdee, Banchongduang, and Chudasri 2020) Polkuamdee, Nuntawun, Somruedi Banchongduang, and Darana Chudasri. April 17, 2020. “Bank of Thailand’s BSF Faces Slew of Criticism.” Bangkok Post, sec. Business.
News article describing criticism of the BSF by former BOT officials.
Key Program Documents
(BOT 2020) Bank of Thailand (BOT). June 16, 2020. “Policies and Operating Guidelines.”
Slideshow describing the BSF’s terms and conditions.
(BOT, MOF, and SEC 2020) Bank of Thailand, Ministry of Finance, and Securities and Exchange Commission (BOT, MOF, and SEC). March 22, 2020. “Joint Statement on the Measures to Stabilize the Financial Markets.” Press release.
Press release announcing the BSF and two other bond purchase programs.
Key Program Documents
(BOT 2021) Bank of Thailand (BOT). 2021. Annual Report.
BOT annual report reviewing the year’s financial conditions and usage/creation of implementation tools.
(TBMA 2020a) Thai Bond Market Association (TBMA). 2020. “MTM Corporate Bond Index.”
Data summarizing movements in prices of Thai corporate bonds.
(TBMA 2020b) Thai Bond Market Association (TBMA). March–April 2020. “Commercial Paper Index.”
Data summarizing movements in prices of Thai commercial paper.
Taxonomy
Intervention Categories:
- Market Support Programs
Countries and Regions:
- Thailand
Crises:
- COVID-19