Thai Credit Rating Agency Demotes Lao Sovereign Rating to Below Investment Grade

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The Lao government has issued the first-ever Thai Baht bond in the Lao domestic market, as a Thai credit agency downgraded the country’s credit rating to BB+.

The Thai Rating and Information Services (TRIS), Thailand’s first credit rating agency, demoted the sovereign rating of Laos from BBB- to BB+ in September, a move which is expected to cause much of the demand from Thai investors to trickle out. This in turn has also demoted the Electric Du Laos (EDL) – Generation Public Company, a state-owned enterprise 100 percent owned by the government of Laos, to BBB- to BB+.

Fitch, an international credit rating agency based in New York City and London, considers BBB ratings as “good credit quality”, and indicates that expectations of default risk are low. The capacity for payment of debt is considered adequate, but adverse business or economic conditions are more likely to impair this capacity.

Whereas BB ratings are rated “speculative”, and indicate an elevated vulnerability to default risk, particularly in the event of adverse changes in business or economic conditions over time; however, business or financial flexibility exists that supports the servicing of financial commitments.

Currently, Thailand’s regulations require foreign bond issuers to be rated at least BBB in order to sell bonds in Thailand, although the Thai government may still allow Laos to sell bonds through exemptions. Nonetheless, most Thai investors tend to steer clear of such low rated bonds.

Demand for Lao bonds have been decreasing even before the latest downgrades in September, as TRIS cited the sharply depreciated Laotian kip and high inflationary pressures in Laos as major reasons behind the downgrades.

In August, Laos aimed to raise funds by issuing two types of bonds, three year bonds with an interest rate of 6.1 percent, and four year bonds with an interest rate of 6.6 percent. However, Laos was only able to attract THB 785.5 (USD 21,173,081) million in investment for these bonds, falling short of the target set at THB 3.6 billion (USD 97,037,676).

As a result, Laos launched a “budget balancing bond” domestically to fund the refinancing in September, with the aim of raising THB 3 billion (USD 80,862,540). The bonds include varying tenors of one to 10 years, with an interest rate ranging from 5 percent to 8 percent. 

“Interest has been very strong with indications that Laos could raise up to Bt5bn, but the government has decided not to absorb all the demand so that it can return in the future to tap more baht-denominated funds,” a source close to the borrower told the International Financing Review.

Both the Thai baht and US dollar bonds are being sold via BCEL-KT as lead arranger, and Lanexang Securities and Lao-China Securities as arrangers.

Laos, which has more than USD 10 billion in foreign debt, has met interest obligations on its baht-denominated bonds, paying THB 75 million (USD 2,022,190) last week, and setting aside another THB 350 million (USD 9,433,963) for interest payments that were scheduled for 5 October. 

TRIS also noted that Laos has multiple sources of foreign-currency funding to meet commercial debt obligations, including its revenue inflows, monetising state-owned assets, receipts from mining concessions, borrowings from domestic commercial banks and raising funds in the domestic bond market.

However, even if Laos’ ongoing fiscal consolidation plans and efforts to cut inflation eventually restore its investment-grade rating – BB or higher, TRIS will take about 12–18 months to finalize a rating review. That indicates that the Thai bond market will remain closed to Laos and EDL-Generation during that period of time.