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New guidelines to prescribe reserve funding for corporate bonds

Aug 10. 2019
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By The Nation

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The Thai Bond Market Association (ThaiBMA) has said that guidelines are being drafted on reserve funding for corporate bonds, which were expected to be effective at the end of the year, while the IFRS 9 will be effective next year.

A UOB analyst commented that it would have only a slight affect on the market as banking institutions and insurance companies invest in high-rated corporate bonds. The ThaiBMA has suggested that the reserve fund should depend on the rating of corporate bonds.

Ariya Tirnapragit, deputy managing director of the ThaiBMA, said that the International Financial Reporting Standard, IFRS 9, would be effective in 2021. The measure would affect insurance companies and commercial banks. Listed companies who invest in corporate bonds have to reserve fund in case of bad debt. The bad debt reserve will depend on the corporate bond’s rating and the term of the corporate bond. High-rated bonds will have low reserve fund while low-rated ones will require high reserve funds. Also, long-term corporate bonds will have a higher reserve fund than short-term bonds.

The association was in the process of preparing the guidelines following new standards in the IFRS 9. They will hold a focused group discussion with other parties in the bond market such as the federation of accounting professions, commercial banks, insurance companies, securities companies and asset management companies. 

“The new financial reporting standard ‘IFRS 9’ has more stipulations. In the future, every investment has to reserve funds for possibility of bad debt from loans, credit and corporate bonds. The ThaiBMA is focusing on corporate bond investments by creating guidelines for small companies to help them reach the new standards” Ariya added.

Kitpon Praipaisarnkit, a strategist at UOB Kay Hian, said that there was not enough information to decide if the reserve fund would affect the market, as companies that invest in corporate bonds usually choose high-rated bonds. Companies do not have expectations of high returns, and returns higher than from savings accounts were acceptable.

An indirect effect from the IFRS 9 is the higher cost of corporate bond sales, as low-rated bonds have a high maintenance cost, which will affect medium companies with unstable financial status.

“Investors in corporate bonds are commercial banks, insurance companies and listed companies mostly through commercial banks. These parties have already prepared for the new standard and they will invest in high-rated bonds,” Kitpon said.

Ariya said that since July 2019, private companies had sold Bt650 billion worth of bonds, expected to reach Bt700 billion by September.

In addition, the Bank of Thailand will start Basel III measurement next year, including capital accords, as bonds will be able to convert to funding for five years, increasing the chances of bond sales. However, commercial banks have already invested in new corporate bonds to replace old bonds due to the lower bond cost.

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