Leading the Way is a column written by PricewaterhouseCoopers professional staff. It appears in the Business section of the Bangkok Post twice each month. The column provides specialised advice to corporate decision-makers in Thailand on global and local business trends.
This article appeared in the June 24, 2008 issue of the Bangkok Post.
By Frank Janik
After a number of years of little or no activity in their non-performing loan (NPL) portfolios, 2007 turned out to be one of the busiest years for NPL activity in Thailand since the Asian economic crisis a decade earlier. Five banks held multiple-tranche public auctions, including one bank holding multiple auctions.
There were also a number of attempted bilateral deals, with market rumours reporting mixed results, as well as a number of single credit transactions. The director of PricewaterhouseCoopers' distressed debt group, Frank Janik, recently sat down to answer some key questions on Thailand's NPL market.
Q. There was much talk of what effect the Capitals Control Act, the military coup of 2006 and the elections held in late 2007 would have on Thailand's economy. Have these events affected the NPL market?
A. The commercial reality has been very much "business as usual". There is continued interest in Thailand for both NPL portfolio acquisitions and single-credit deals. More recently, activity in single credit deals has increased due to the recent credit crunch.
Q. What percentage of Thai bank loans do NPLs represent?
A. According to the Bank of Thailand, as of December 2007 gross NPLs represented 7.81% of total loans (commercial banks registered in Thailand), or 442 billion baht. The Bank of Thailand defines gross NPLs as the outstanding amount of loans classified as substandard, doubtful, doubtful of loss, and loss.
Q. How are NPL sale transactions usually conducted in Thailand?
A. For large portfolios, sales are generally conducted via a sealed auction bid process. It is also becoming apparent that both sellers and buyers are preferring to conduct NPL sale transactions via an Asset Management Company (AMC). While there is no legal requirement to involve an AMC in a NPL transaction, the key benefits of selling to an AMC include tax benefits for the buyer and seller - resulting in a possible higher purchase price for the NPLs - and an automatic right of subrogation for the AMC into an ongoing legal action. AMCs are governed by the Royal Proclamation on Asset Management Company B.E. 2541 (1998).
Q. How could the current credit crunch resulting from the US sub-prime crisis affect NPL sales in 2008?
A. Independent research by PwC indicates that appetite for Thai distressed debt (and indeed Asian distressed debt) remains high. Still, pricing will likely be affected, as the cost of debt and/or required returns is now higher. This will likely affect the number of players in the market. However for those players with access to cash there are now more opportunities, especially in the single credit/private equity market.
Thai banks, perhaps riding on the successful outcomes of 2007 sales, are continuing to plan sales in 2008, with market rumours indicating that at least four banks will go to market this year with upwards of 50 billion baht worth of NPLs and non-performing assets (NPAs).
Q. What opportunities may emerge in Thailand's NPL market in 2008?
A. In addition to the previously mentioned NPL sales, other opportunities likely to arise include the property sector, where perhaps the first effects of the tightening of credit policies are being felt and increasing consumer debt (notably credit cards) which may lead to banks and finance companies looking to offload these exposures. A number of banks may now also be looking to offload their equity holdings acquired via debt restructuring of borrowers in the late 1990s and early 2000s.
The stricter classification and provisioning guidelines contained in Basel II is also causing most banks to actively clean up their loan books.
For more strategic plays, the Financial Institutions Development Fund has indicated that they will likely be looking to sell their equity positions in a number of Thai Banks acquired during the crisis.
Q. What is the outlook for the Asian NPL market in 2008?
A. On balance, the Asian NPL market in 2008 is expected to be active. In addition to Thailand there are ongoing and expected sales in Malaysia, Philippines, Taiwan, India and Indonesia. One affect of this is that sellers of NPL portfolios will need to give consideration to activities outside their own borders when planning their sales so as to attract maximum interest in their transaction.
To learn more about recent NPL activity in Asia, please download our report "NPL Asia: Issue 9, May 2008"
