First Half NPL Sales Boom in Thailand

In the first half of 2014, 6 NPL portfolios, comprising 18 individual tranches, have reached the market with a total combined face value of US$ 1.28b. This already matches the annual average sales achieved since 2008, and is almost double the volume traded in the whole of 2013. This trend is expected to continue into the last quarter of 2014 and through 2015.

First Half NPL Sales Boom in Thailand

Business in Southeast Asia generally booms when economies are stable. After the recent Thai military intervention, the international media sensationalized the issue, depicting some kind of social disaster to be unfolding in the Kingdom. On the ground in Thailand, nothing could be further from the truth. Markets and the business sector actually welcomed the intervention, as it removed the prevailing political uncertainty, and brought about a return of peace and stability. Confidence has returned to the property market and consumer sentiment has rebounded strongly. Throughout the intervention, the currency and equity markets have barely blinked, which is a sound reflection of commercial sentiment.

The main victim of the political upheaval has been the Bangkok tourism industry. Hotels, particularly, have been traumatized by low occupancy. The upheaval robbed the hospitality industry of its essential high season income, and low season cash flow has been unable to make up for the shortfall since. A number of properties now have debt problems, and lenders will likely wait to see the financial impact of the end of year high season before deciding what to do next. Outside Bangkok, the hospitality industry has been less affected, and some areas have actually benefitted from upheaval when bookings were transferred from Bangkok hotels out to the resort markets.

The impact on the NPL market has been limited. Our experience is NPL collections in 2014 far outstripping 2013 numbers. Banks offloading NPL portfolios in 2014 has been more due to nervousness over global and regional markets and high household debt levels, rather than domestic political issues. The banks that have sold NPLs are the same ones that usually undertake regular clean-outs; the only difference has been an increase in scale. Since the Millennium, the regulators in Bangkok have strongly and consistently encouraged banks to clean up their balance sheets through debt sales, which is why Thailand steadily continues to maintain by far the biggest and most active NPL portfolio trading market in ASEAN.

The Property Market

Regional commentators have recently been expressing concerns about property price inflation in a number of Southeast Asian markets; notably in Singapore and Bangkok. Given we have seen double digit percentage price increases for over a decade in some sectors, they are right to be concerned. However, this also needs to be viewed in the light of enormous structural changes that have occurred within cities and markets, and the influence of GDP growth, which has doubled, and even tripled in places, since the Millennium.

Southeast Asia 2000 and 2014 are chalk and cheese. What goes up should logically come down, unless market cycle amplitude expands significantly, which is what has occurred in a number of spots. Once fundamentals change, market levels do not revert back to past historic norms.

A case in point is the Bangkok condominium market, which for the past three years, according to some sources, should, given the growth numbers, have experienced a devastating crash. On the face of things, this sector has done remarkably well to survive intact until 2014. Drilling down though, reveals a different picture. The biggest influence on this market has been the development and extension of the mass transit rail network, which the domestic condominium market has been tracking. A major socio-economic shift has occurred within a decade in Bangkok, whereby the traditional extended family has been replaced by a new generation of young, suburban, property owning, mass transit commuters. The new generation is much more in step with London or New York than the historic, time-honoured, Southeast Asian city community model.

Often in developing markets, major new infrastructure projects becomes an unsustainable pump priming exercise. This is certainly not the case for the Bangkok mass transit system, which has not only induced real change, but has benefitted the city GDP, its inhabitants, commerce and the banks. In the same way, that a new normal has appeared inducing structural change between London and the UK, so we are seeing hugely changed dynamics between Bangkok and the rest of Thailand. Like the UK though, this also drives its own social problems in the shape of escalating inequality and disparity between city and country, as well as impacting the underlying fundamentals of the property and NPL investment markets.

NPL Growth in the Banking Sector

Given the slowdown in China, the financial health of the banks throughout the region is becoming more and more uncertain. It is now 16 years since the 1997 Asian Crisis. After a brief respite from lending after GFC 2008, the banks have embarked upon a period of substantial credit expansion ever since, and certainly well in excess of their GDP growth rate. The region is clearly nearer the top end of the credit cycle. NPL rates within the banks have mushroomed and in 2014 they have become much more conservative about new lending. The concept of "pretend and extend" in terms of credit rollover is now rife.

The actual NPL ratio in the banks is likely to be multiples of what is now declared to central banks. Our view of the true regional NPL ratio is somewhere between 5% and 10% of loans, which means there is probably in excess of US$200 billion of distressed loans in Southeast Asian banks now. Given that Southeast Asia does not have a Federal Reserve or European Central Bank, quite how governments and central banks address their burgeoning financial sector debt problem remains to be seen, but an increase in the level and amounts of NPL portfolio divestment looks to represent a reasonably good bet.

The Outlook for NPL Investors

Since the Millennium, the mean trading price of property-backed NPLs in Thailand, as a percentage of loan face value, is 46 cents on the dollar. In the same period, NPL collections by primary investors have averaged 94 cents on the dollar. Thailand is frequently criticized by investors as being a "borrower friendly" jurisdiction with difficult, long winded enforcement and execution procedures. This certainly seems to be the case for many of the commercial banks, where typically between 30% and 40% of collections are made by personal negotiation, with the remaining 60% to 70% having to go through the full length of the legal enforcement process. Where dedicated special servicers have gained market advantage over the banking sector is in the percentage of collections made by negotiated settlement, where we would expect nearer to 80% of NPL collections to be achieved by compromise. With collection dynamics like this, it makes commercial sense for local banks to continue selling NPL portfolios, and a win-win for investors to continue buying Thai NPLs.

However, since the 2008 Global Financial Crisis, the number of institutional investors, seeking to acquire NPLs in Southeast Asia has plummeted, as western institutions have returned to focus their resources on home jurisdictions. In 2008 there were 14, mostly foreign, institutional investors competing in the Thai NPL market. In 2014 only 3 remain. This comprises 2 Thai entities that do not compete with each other, and one international investor that only bids occasionally. As a result 90% of all NPLs in Thailand in the past 2 years have been purchased by one investor. The disappearance of the NPL investment crowd from Thailand has occurred at a time when buying prospects are racing upwards, which is creating its own one-off regional investment opportunity.