Thailand: Bond Stabilization Fund

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.

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.^FTen 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.

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).

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).

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).

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.

KTAM was required to report the fund’s performance on its website on the first business day of each month (BOT 2020, 7).

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).

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.

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.

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.

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).

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.

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).

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).

No haircuts were applied because the BSF did not engage in lending.

The BSF did not specify interest rates because it did not engage in lending.

No documents suggest that the BOT would have charged other fees to participants.

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).

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).

No documents suggest that firms or lending banks would have received relief from capital or liquidity regulations because of participating in the BSF.

No such programs appear connected to the BSF.

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.