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13 Mar 2009

Financial Markets

Investment Alternatives amid Low Interest Rates and Market Volatility (Business Brief No.2454)

Amid crimped capital markets worldwide reeling from the global crisis, especially increased credit and counterparty risks, KASIKORN RESEARCH CENTER (KResearch) holds the view that fund raising via stock markets or international funding sources may prove to be difficult or too costly. Despite declining lending rates in line with the BOT's policy rate, businesses may find that their funding costs may not drop as much as loan rates because commercial banks have been compelled to pursue more cautious business operation (similar to other businesses). Moreover, much depends on loan applicants' risk status and their collateral value in applying for loans.
In this difficult economic environment, fund mobilization via debentures may be the right answer for some private companies, especially in a downward interest rate trend. Even though long-term bond yields are edging upward, they are currently regarded as low. For instance, the 5-year government bond yield stands at 2.65 percent (as of March 11, 2009), up from the lowest level in almost five years seen at the end of 2008. So, it is now the right timing for companies to issue debentures to lock in their long-term funding costs while also offering attractive returns to investors. Amid the very low deposit rate environment, investors and savers may be attracted to debentures. On the downsides, however, possible economic recovery and gradual increases in interest rates in the years ahead to reflect higher inflationary pressure and the government's fiscal deficit policy may cause savers to be somewhat reluctant toward long-term instruments. Even so, the debentures of financially sound companies trusted by the general public may prove to be popular with investors, especially those bearing attractive interest rates.

Thus, debentures are expected to be quite active this year. The value of debenture issuance may reach THB400 billion, up from THB280 billion last year and the annual average of THB200 billion between 2005 and 2007. KResearch holds the view that the companies with strong financial standings and/or good credit ratings may be successful in their debenture offering. However, companies facing restrictions in fund mobilization via debenture issuances may have to bear higher funding costs, or seek bank loans for working capital instead, or they may have to wait until the dust settles in capital markets at home and abroad.

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Financial Markets