The Capital Market Supervisory Board (CMSB) defines the credit rating requirements for capital bonds issued by commercial banks and perpetual subordinated bonds. The regulations impose pre- and post-offer obligations that issuers must meet. One of the new regulations also requires that perpetrators (or underwriters) of perpetual subordinated bonds perform the investment suitability test on investors who are investing in perpetual subordinated bonds for the first time.
Obligations which must meet the new requirements
By defining the new requirements, CMSB amended five existing regulations[1] which govern different types of bonds (varying according to the type of issuer and the denomination of the bonds). Accordingly, the following bonds which are offered in Thailand are subject to the new requirements.
- Baht-denominated bonds issued by Thai companies
- Bonds issued by Thai government agencies
- Foreign currency denominated bonds, whether issued by Thai or foreign entities
- Baht-denominated bonds issued by foreign entities under the program of the Ministry of Finance of Thailand
- Financial instruments denominated in Baht issued by commercial banks to qualify as regulatory capital in accordance with Bank of Thailand regulations.
For the purposes of this alert, we will refer to financial instruments as “bank capital bonds” and the other bonds mentioned above “subordinated perpetual bonds” because some of the requirements apply to one category but not the other.
Credit rating requirements
Pre-offer
- Perpetual subordinated bonds
For any perpetual bond offering, an issuer will need to obtain credit ratings. Whether it is issuer ratings or rating issues depends on the type of offer. (Issue ratings are required for High Net Worth Bids (HNW) and Public Bids (PO).) Additionally, in the case of HNW or PO, the issuer must be assigned the rating of l good quality transmitter. The requirements are less strict than those of POs and HNWs for the private placement of up to 10 investors over a period of 4 months (PP10) or offers to institutional investors (II) which only require one issuer or an issue rating. whether it is investment grade or not. The following table provides a summary of the credit rating requirements described above.
Issuer rating | PP10 | II | HNW | PO |
|---|---|---|---|---|
Investment quality | ü | ü | ü | ü |
Non-investment grade | ü | ü | û | û |
For any offering of Bank Capital Bonds, credit ratings are required whether it is HNW or PO. If the bank capital bonds are intended to be considered additional level 1 (AT1) capital, the issuer must also be assigned the investment quality rating. Credit rating requirements are not required if it is PP10 or II. Note that in the case of POs, the current regulations only allow level 2 bonds with the loss absorption mechanism through the conversion of the bonds into ordinary shares of the issuer.
Issuer rating | PP10 | II | HNW | PO | ||||
|---|---|---|---|---|---|---|---|---|
To 1 | Level 2 | To 1 | Level 2 | To 1 | Level 2 | To 1 | Level 2 | |
Investment quality | Not required | Not required | Not required | Not required | ü | ü | Prohibited | ü |
Non-investment grade | Not required | Not required | Not required | Not required | û | ü | Prohibited | ü |
Post-offer
Issuers who are required to obtain credit ratings prior to offering as described above should also conduct a periodic credit rating review. Since credit ratings may change over time, issuers do not need to maintain applicable good quality credit ratings with respect to periodic updating.
Obligations of arrangers
In addition to the requirements for issuers, another amended regulation[2] requires arrangers to perform the investor suitability test to assess whether perpetual subordinated bonds are suitable for investors. Every investor must pass the test if this is the first time they have purchased this type of product (i.e. perpetual subordinated bonds). If the investor fails the test, the regulations only prevent the arrangers from continuing to offer the perpetual subordinated bonds to the investor. However, the investor can still buy the perpetual subordinated bonds if the investor wishes. This requirement does not apply to offers of bank capital bonds.
To help arrangers meet this requirement, the SEC Office has prepared templates for a questionnaire (knowledge test) and an acknowledgment letter that the arrangers will distribute to investors. Templates are broad in nature and arrangers must adapt them to suit their transactions and the terms and conditions of the product.
