Construction giant Italian-Thai Development adds to Thailand’s corporate debt woes

Construction News
Italian-Thai Development has outstanding bonds of 14.5 billion baht ($414 million), with a tranche worth 2 billion baht due on Feb. 15. © Getty Images

Construction giant Italian-Thai Development adds to Thailand’s corporate debt woes

Bond market tries to ease contagion concerns, with total $25.4 billion due this year

Bangkok-listed construction giant Italian-Thai Development will on Wednesday ask bondholders to delay debenture payments for two years, becoming the latest Thai company to suffer debt problems amid high interest rates and low market liquidity.

The price of ITD shares has fallen by 28% since Jan. 5, the trading day before the company filed the notice to bondholders during the market lunch break on Jan. 8. The company has outstanding bonds worth 14.5 billion baht ($414 million), with the tranche in question worth 2 billion baht and due on Feb. 15. Two other series are due later this year, part of the nearly 1 trillion baht ($25.4 billion) worth of Thai corporate bonds maturing in the next 12 months.

Fears of a liquidity crunch are spreading, and several listed companies whose growth was fueled by debt during three years of low interest rates have already defaulted on debentures. High-profile defaults in the past year include Miss Universe owner JKN, whose bankruptcy court date is on Jan. 29, and scandal-hit wiremaker Stark, under investigation for accounting fraud.

After recording net losses from 2019 to 2022, ITD returned to profit only in the first nine months of 2023. An 8 billion baht investment in Dawei, a special economic zone in Myanmar, as well as a high-speed rail project were suspended after the February 2021 military coup. A potash mining project in northeastern Thailand has not progressed, and government contracts were delayed by COVID and the post-election political impasse.

ITD’s reputation suffered when Premchai Karnasuta, its former chairman and largest shareholder, was convicted in 2019 and sentenced to three years in prison for poaching wildlife. He was released on parole in October and remains president of the company.

“The company has to take the opportunity to reform itself too. If investors give them a second chance, they must make sure to adhere to the code of ethics,” said Ariya Tiranaprakij, senior executive vice president at the Thai Bond Market Association.

The Thai Bond Market Association said outstanding bonds coming due in 2024 are largely of investment grade, while only 10% are riskier high-yield bonds. About 22 billion baht, including Thai Airways bonds, are under rehabilitation or restructuring. The association will recommend to the Securities and Exchange Commission that bond issuers disclose information to bond representatives on all tranches, rather than only each individual tranche.

Ariya said the contagion will not spread to the property and construction sector, whose aggregate index fell by 1% over the week after ITD’s notice to bondholders. “The property sector can resort to using their assets such as land and buildings for bank loan collateral. They are still in a better position than other sectors,” she said.

Among the top construction companies — including Sino Thai and CH Karnchang — ITD had the weakest operating performance, less-diversified investments and more overhanging costs, according to analysts.

But mid- to small-cap developers in the property sector may face similar liquidity problems. Shares in Nusasiri have dropped by 61% in the past year amid poor operating results, suggesting concern about bond tranches due in February and September.

The ratio of interest-bearing debt to EBITDA (earnings before interest, taxes, depreciation and amortization) is about 27 times, said Vanida Geisler, a property analyst at KGI Securities, “which means they cannot generate enough cash flow to finance interest.”

“Nusasiri might have more options than ITD because their [debt-to-equity] ratio is not too high and they have assets that could be liquidated. Bondholders would be able to get their money back after some time,” Vanida added.

Corporate bond defaults were on the agenda when Prime Minister Srettha Thavisin, concurrently serving as finance minister, and Bank of Thailand Gov. Sethaput Suthiwartnarueput met on Wednesday. The prime minister has pressed the central bank to lower the policy rate, which stands at a 10-year high of 2.5%.

The government’s plan to finance its digital wallet stimulus by borrowing 500 billion baht — half the size of bonds maturing this year — may also be dampening investor interest in corporate bonds.

“It is a concern that the government may step into the borrowing market and push borrowing costs higher due to the need to finance the digital wallet,” said Kitpon Praipaisarnkit, vice president at UOB Kian Hay Securities.

Thai media reports suggest that the government and central bank may set up a support fund to help troubled companies.

“If it happens, it would be good for the market but it would raise questions about moral hazard and the need for companies to keep their financial discipline,” said Kitpon.