Tuesday December 23 12:26 AM PST
Bonds become 'fallen angels'
By Parista Yuthamanop
Moody's Investors Service yesterday downgraded Thai bonds to junk
status, giving existing debt issues the status of "fallen angels'' --
investment-grade securities gone sour.
Moody's lowered Thailand's foreign-currency rating to Ba1 from Baa3. The
foreign-currency bank deposit rating was confirmed at B1.
The action affects outstanding and future debt instruments issued by
Thai corporations and state agencies, and will significantly increase
the cost of new borrowing.
The baht dropped slightly on news of the Moody's downgrade, with Bangkok
Bank quoting a high of 47.20, a low of 46.40 and a close of 47.20 to the
dollar.
"The downgrade . . . reflects continued concern over the country's
credit and financial fundamentals,'' the US credit agency said in a
statement.
"The new government has started a long and difficult adjustment process.
However, domestic political conditions may limit progress in this
area.''
Also downgraded were credit ratings for Indonesia, South Korea and
Malaysia, with Moody's citing the increased strains on banking systems
in the three countries because of slowed economic growth and currency
turmoil.
"The East Asian financial crisis has exposed the vulnerability to
changes in market confidence of a number of countries that had built up
high levels of short-term liabilities,'' Moody's said.
"The outflow of funds from these markets and the resultant currency
depreciations have added to problems in the banking sectors of these
countries, some of which were already suffering from asset-quality
problems.''
Moody's added that the economic difficulties in Japan had magnified the
difficulties encountered throughout the region.
"Weaknesses in the Japanese economy and banking system added a further,
negative backdrop to the prospects for the region. Japan is a major
trading partner of, investor in and lender to most of the countries in
East Asia,'' the agency said.
"Slow growth in Japan limits the prospects for rapid export growth from
the other countries, while the problems of Japanese banks limit their
ability to maintain lending activity in the region.''
Bank of Thailand governor Chaiyawat Wibulswasdi acknowledged that the
downgrade resulted in Thai debt instruments being rated below investment
grade.
Still, other avenues existed for Thai borrowers which could mitigate the
adverse costs of the downgrade, he said, including private placement of
new debt issues or by syndicated loans.
Dr Chaiyawat said it would be more difficult for both the government and
local firms to borrow funds from international capital markets in the
future.
"The downgrade will raise interest rates throughout the market and
affect investors. But that doesn't mean that we can't issue new bonds.''
It is widely expected that the government will be forced to issue new
bonds in international capital markets to raise the funds needed to bail
out the financial sector.
The International Monetary Fund recently agreed to allow Thailand to
raise the new government debt ceiling to $9 billion from $4 billion.
If necessary, the central bank could borrow more from the IMF to
supplement official foreign reserves under the supplemental reserve
facility (SRF) next year.
The IMF approved setting up the SRF last week as a quick assistance
mechanism for countries struck with sudden balance of payments
difficulties. Thailand this year will receive about $9 billion out of a
total $17.2 billion arranged under the IMF package signed in August.
Finance Minister Tarrin Nimmanhaeminda said he spoke with Moody's
representatives yesterday, who explained that the downgrade of
Thailand's credit rating stemmed from the regional currency crisis.
While Moody's understood the strides taken by the government to address
the economic problems, they viewed that the task had been made more
complicated by the turmoil which had struck the region, he said.
Dr Chaiyawat said Moody's was taking a regional perspective in its
latest downgrade, viewing that Asian currency crisis would complicate
Thailand's task of engineering an economic recovery.
He said Thailand's economic fundamentals had shown signs of improvement.
The current account deficit has contracted sharply in recent months,
with a surplus posted in October, reflecting the country's reduced
dependence on foreign capital.
Dr Chaiyawat said the central bank was also moving aggressively to
rebuild confidence in the financial sector, pushing undercapitalised
firms to increase capital by the first quarter of 1998.
Copyright Post Publishing Public Co., Ltd 1997. All the days Thai
stories at The Bangkok Post Internet Edition.
Posted at 10:02 p.m. PST Monday, December 22, 1997
Credit ratings of 3 tigers downgraded to `junk'
BY TIMOTHY L. O'BRIEN
New York Times
Asia's economic crisis deepened Monday as one of the world's largest
credit-rating agencies downgraded the sovereign debt of South Korea,
Indonesia and Thailand to ``junk'' status, seriously impairing their
ability to raise the money needed to work through the region's wrenching
downturn.
In issuing the downgrades, Moody's Investors Services Inc. said the
region's prospects were further threatened by severe financial problems
in Japan.
If Japan's economy was more robust, it might be able to play a stronger
role in resolving the Asian turmoil. But because Japan is also flailing,
Moody's said, its consumers cannot provide a lift to Southeast Asian
exports and its banks cannot increase the lending that is badly needed
throughout the region.
South Korean President-elect Kim Dae Jung said he was ``flabbergasted''
by the country's financial situation and that the country's reserves
could hardly last for even one more day, the Chosun Ilbo said in its
editions today.
``We don't know whether we would go bankrupt tomorrow or the day after
tomorrow,'' Kim was quoted as saying. ``I can't sleep since I was
briefed (about the financial situation). I am totally flabbergasted.''
The downgrade contributed to another sharp decline in Asia's stock
markets and currencies Monday as the specter of wide-ranging and
potentially disastrous defaults loomed closer in a region that has gone
from economic darling to financial pariah.
Stocks in Tokyo dropped 3.4 percent Monday to their lowest level since
July 1995, while the Hong Kong market fell 2.2 percent and South Korean
stocks dropped 1.2 percent. The South Korean currency, the won, fell 9.2
percent against the dollar.
In early trading today, South Korean stocks plunged 7.5 percent and the
won slumped another 12.4 percent.
(The Japanese stock market was closed today for the emperor's birthday,
a national holiday.)
``One of the key things we have to recognize is that as they recover and
try to issue new debt, these countries will be limited in the markets
into which they can sell,'' said David Durrant, an analyst with Idea, a
financial consulting firm in New York.
The downgrades had been expected, but since the investment guidelines of
most managers prohibit holding junk-rated debt, the action caused a
sell-off of the debt Monday.
The junk ratings also mean that these big investors will not be buying
more such debt. South Korea, for one, had planned to issue $9 billion in
new sovereign debt in January, but that plan is now threatened by
questions over who would buy the securities and whether the interest
rates would be prohibitively expensive for South Korea.
Moreover, while Moody's and other ratings agencies had issued less
severe downgrades as the Asian crisis unfolded, this is the first time
Moody's jointly downgraded a handful of countries in the region. Moody's
also mildly downgraded Malaysia, while affirming ratings for China and
Hong Kong.
To compound the pain, Moody's also lowered ratings on the corporate debt
of banks, financial services concerns and other formerly blue-chip
borrowers in South Korea, Indonesia and Thailand. Those actions included
downgrading 5 Indonesian state banks; 11 Thai banks and financial
services companies, and 20 Korean banks.
The Standard & Poor's Corp., another large rating agency, added to the
gloom by cutting South Korea's long-term foreign currency rating to junk
status, saying that the country's liquidity position is ``among the
worst of rated sovereigns'' and that the ``external liabilities of the
banking sector are twice the sector's external assets.''
Although the world of debt ratings may seem arcane, the impact of a
major downgrade is swift, unforgiving and very real. In much the same
way that homeowners may have to cut back on groceries or scrimp on
heating bills if forced to pay a higher interest rate on a mortgage, a
country or a corporation is hurt when borrowing becomes more expensive.
In South Korea, the Korea Development Bank, the largest state-owned
bank, recently canceled a $2 billion bond offering when it became
apparent that potential investors would demand an interest rate of as
much as 11 percent. But that rate, which seemed Draconian just a few
weeks ago, now looks relatively cheap.
After the ratings cuts were announced, the interest rate on the Korea
Development Bank's existing bonds due in 2006 shot up to about 12.7
percent, compared with about 11 percent Friday. Some of the bank's bonds
due in 2001 traded Monday with interest rates ranging from 14.7 percent
to 15.7 percent.
Japan is by far the biggest source of loans to Asia and defaults in the
region pose the most dire threat to that country. Although only partial
information is available, it appears that about half of all external
debt in Southeast Asia is held by the Japanese, with a much smaller
portion, between 10 percent and 20 percent held by lenders in the United
States, according to Moody's.
)1997 Mercury Center. The information you receive online from Mercury
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