Circumstances have been favourable. Banks are more risk averse due to the economic slowdown and have not been actively extending loans. Meanwhile, lower yields and reasonable credit spreads mean that rates are appealing for borrowers. At the same time, very low bank interest rates make bond yields attractive to savers.
Already this year, corporations have sold more than Bt250 billion in longer-term bonds, not including short-term commercial paper, for an increase of 120 per cent from the same period last year.
The two main distribution methods for bonds are selling directly to retail investors, or selling to institutional investors such as mutual funds or insurance companies, which in turn distribute them to the general public.
The current craze for corporate bonds is to sell directly to retail investors.
On the surface, this appears to be more efficient. However, direct retail sales have major limitations with two key concerns - credit risk and liquidity risk.
Years ago, retail sales of bonds started out with issuance by the government, or by the very best corporate names. However, it has since evolved into virtually any company selling bonds to the general public, significantly raising the potential credit risk.
This has several implications:
lRetail bond investors usually have exposure to only a few names and underestimate downside risks, while lack of diversification raises the possible loss should any transaction go bad.
lRetail investors often do not have the resources to monitor and analyse changes in corporate credit risk on an ongoing basis.
lRetail investors may not be knowledgeable enough to demand appropriate pricing to match the risk involved.
The other key concern is that retail-oriented bond issues usually lack liquidity in the secondary market. Even if savers plan to buy and hold bonds until maturity, unforeseen circumstances could make them change their minds.
If sales are possible at all, bid-offer spreads are likely to be very large to the small investor. In case of a forced sale, there could also be mark-to-market losses that are difficult for retail investors to hedge, unlike institutional investors that may be implementing yield curve strategies.
For all these reasons, institutional investors theoretically have many advantages over individuals in buying and managing bonds.
At the moment, local financial institutions still have room for development. Bond mutual funds tend to be focused on short-term money market debt, rather than on longer-term corporate bonds. There is a lack of activity in the secondary market, while hedging is still not widely used.
Over time, however, the market should continue to develop. Greater issuance will lend depth to the market. Institutional investors will gain in scale and sophistication. And hedging tools such as interest rate futures and repurchase agreements will become available, or more widely used.
In the medium term, this would be healthy for the local financial system, and would be better for consumers as well.