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Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

<a href="https://www.smartkarma.com/entities/bangkok-bank-public-co-ltd" target="_blank" data-smartkarma-citation="entities:213:1" rel="noopener">Bangkok Bank's (BBLTB)</a> inaugural Additional Tier 1 (AT1) bond offers an attractive higher yielding coupon for the current interest rate environment. Thailand is a long-term Coronavirus vaccine recovery play. We recommend that investors overweight this security.Bangkok Bank’s 5% callable 2025 US$-AT1 bond was 2x subscribed with over 40% of orders from outside Asia, according to Bloomberg. This should keep some interest in this security over the near term. In addition to this technical, we outline what we like and dislike regarding the issuer and this security, which we elaborate on within.  What we like:<ul>
<li>The five percent coupon should attract investors searching for higher yielding product.</li>
<li>The relatively high coupon reset level at five-year US Treasuries plus 473 should enable call at first call date, absent considerable credit quality deterioration.</li>
<li>Bangkok Bank is likely the first of many AT1s to be issued by other Thai banks over the next few months. It should capture fund manager allocations in advance of others.</li>
<li>Relative to <a href="https://www.smartkarma.com/entities/tmb-bank-pcl" target="_blank" data-smartkarma-citation="entities:8090:1" rel="noopener">TMB Bank's (TMBTB)</a> AT1, we believe BBLTB’s AT1 has room to perform.  We see these bonds compressing onto each other on a relative value basis.</li>
</ul>What we dislike:<ul>
<li>Thai bank AT1 is subject to a tougher AT1 coupon payment requirement than is established in other countries.</li>
<li>Bangkok Bank’s purchase of <a href="https://www.smartkarma.com/entities/bank-permata-tbk-pt" target="_blank" data-smartkarma-citation="entities:728:1" rel="noopener">Bank Permata (BNLI IJ)</a> may have been strategically sound, but in hindsight it was tactically poor given the change in operating conditions.</li>
<li>Disclosure is below that of other AT1 issuers in the region and below best practice internationally. Bangkok Bank does not appear to disclose the level of lending that is subject to debt relief due to Covid-19 measures. As such we assess the level of interest income reduction required to generate pre-provision losses at BBLTB versus TMBTB. The result is surprising.</li>
</ul>Despite these misgivings regarding BBLTB, we anticipate that fixed income investors will continue to be pushed to higher yielding instruments including BBLTB’s AT1 bond. As such, a lot of positive developments may already be priced into this bond. For example, Thailand’s higher reliance on tourist generated revenue should benefit from the eventual development of a Coronavirus vaccine. This would prove beneficial for Thai-bank asset quality. At the same time, Bangkok Bank’s AT1 trades wider than TMB Bank’s relative to their Senior Unsecured notes. We expect this discount to evaporate. Taken together, we recommend that investors overweight BBLTB’s AT1 bond on a relative value basis.  Issued at T+476 and trading at around T+ 456, we suggest taking profits at T+400 and recommend a stop loss at T+550.

Bangkok Bank's (BBLTB) inaugural Additional Tier 1 (AT1) bond offers an attractive higher yielding coupon for the current interest rate environment. Thailand is a long-term Coronavirus vaccine recovery play. We recommend that investors overweight this security.Bangkok Bank’s 5% callable 2025 US$-AT1 bond was 2x subscribed with over 40% of orders from outside Asia, according to Bloomberg. This should keep some interest in this security over the near term. In addition to this technical, we outline what we like and dislike regarding the issuer and this security, which we elaborate on within.  What we like:
The five percent coupon should attract investors searching for higher yielding product.
The relatively high coupon reset level at five-year US Treasuries plus 473 should enable call at first call date, absent considerable credit quality deterioration.
Bangkok Bank is likely the first of many AT1s to be issued by other Thai banks over the next few months. It should capture fund manager allocations in advance of others.
Relative to TMB Bank's (TMBTB) AT1, we believe BBLTB’s AT1 has room to perform.  We see these bonds compressing onto each other on a relative value basis.
What we dislike:
Thai bank AT1 is subject to a tougher AT1 coupon payment requirement than is established in other countries.
Bangkok Bank’s purchase of Bank Permata (BNLI IJ) may have been strategically sound, but in hindsight it was tactically poor given the change in operating conditions.
Disclosure is below that of other AT1 issuers in the region and below best practice internationally. Bangkok Bank does not appear to disclose the level of lending that is subject to debt relief due to Covid-19 measures. As such we assess the level of interest income reduction required to generate pre-provision losses at BBLTB versus TMBTB. The result is surprising.
Despite these misgivings regarding BBLTB, we anticipate that fixed income investors will continue to be pushed to higher yielding instruments including BBLTB’s AT1 bond. As such, a lot of positive developments may already be priced into this bond. For example, Thailand’s higher reliance on tourist generated revenue should benefit from the eventual development of a Coronavirus vaccine. This would prove beneficial for Thai-bank asset quality. At the same time, Bangkok Bank’s AT1 trades wider than TMB Bank’s relative to their Senior Unsecured notes. We expect this discount to evaporate. Taken together, we recommend that investors overweight BBLTB’s AT1 bond on a relative value basis.  Issued at T+476 and trading at around T+ 456, we suggest taking profits at T+400 and recommend a stop loss at T+550.

Bangkok Bank’s New AT1 – Overweight on Relative Value

Bangkok Bank Public

Bangkok Bank’s New AT1 – Overweight on Relative Value