Corporations like CP should not be given government assistance if they continue to spend recklessly

The past week has seen a lot of huff and puff over whether the country’s central bank should come to bailout some of Thailand’s leading corporations as the global coronavirus pandemic has created a havoc in the financial markets.

Amid all the ups and downs in the financial market, corporations around the world are trying to preserve every penny they have. The moves to preserve their funds range from cancellation of any major deal they were undertaking down to suspension of dividend payments and not to mention treasury stocks.

‘Treasury stock’ or what as a layman would call as ‘stock buy-back’ is considered to be one of the most unnecessary moves, especially when the liquidity markets is turned upside down as is the case during this coronavirus pandemic.

The continued wave of stay-at-home orders around the world has led to a drastic slowdown in economic activities with the likes of American Express coming out to state that the spending on its cards have gone down by as much as 95 per cent, a move that is likely to put a near stop on the domestic consumption.

Global giants such as JPMorgan Chase, McDonald’s Crop and others have all opted to slam their brakes on share-buy-backs, but yet in Thailand, most companies (with the exception of a few) have continued to go ahead with their planned treasury stock options.

Missing from this list is True Corp Plc., which announced on March 27 that it was undertaking a share-buy-back of 1.5 billion baht.

Amid the ongoing problems, only one firm in the list below (Siam Commercial Bank Plc.) has officially announced that they would cancel the share-buy-back that they had planned to undertake for a cash outlay of 16 billion baht.

SCB, one of the largest commercial banks in Thailand, came out to say that the current economic environment is not conducive to a share buy-back program.

“Given the current economic crisis characterized by extreme volatility and uncertainty in both financial markets and real economy with no end in sight, the Board of Directors at the Meeting No.5/2020 held on April 17, 2020, has approved to cancel the share repurchase program in order to best help the Bank’s customers get through this unprecedented crisis. Furthermore, this decision gives the Bank flexibility and readiness to seize potential business opportunities that may arise from the crisis,” the bank said in a statement to the Stock Exchange of Thailand (SET).

Bank Sends Warning Signal

While SCB said that the economic conditions were ‘extremely volatile and uncertain,’ other Thai corporations continue to operate as though nothing has happened.

If one is old enough, they would remember that it was this mentality in the mid-1990’s that eventually led to the Thai baht being forced to float on July 2, 1997. The unrealistic operations of the Thai corporate sector coupled with the lax banking system led to the 1997 crisis.

Thai corporations in those days never thought that someone would pull the punch bowl away from them but persistent attack on the Thai baht and the stupidity of the central bank to try to defend the currency eventually led to ruin. The country was left with no other option but to let the Thai currency float. 

The central bank and the Thai corporations ignored persistent warnings from all across the world and continued to insist on their ability to handle the situation, but eventually, they bucked under the pressure and the rest is history.

Once again, Thai corporations are bucking the global trend, and despite warning signals from around the world, they continue to operate as if nothing is out of the ordinary.

Central Bank to the Rescue

Once again, the Bank of Thailand (BOT) has been asked to come to the rescue and this time the war chest is ten times what was it was in 1997. With over US$220 billion in foreign exchange reserve, among the top 15 highest reserves in the world, the BOT has already announced measures to help the Thai corporations whose bonds are set to mature within 2020. The BOT has also announced that it would support the corporations who are able to sell 50 per cent of the bond in the open market.

This is a good move by the central bank but questions remain.

As per data available to the public, the total amount of bonds outstanding that are set to mature in 2020 in the domestic market in Thailand stands at 473.188 billion baht and out of this 335.465 billion (71 per cent of the outstanding bonds) are rated grade A and about 74.42 billion (16 per cent of the outstanding bonds) are in the BBB rating, which are ratings that are considered to be good investment grade.

This is a list of the bonds issued by Thailand’s leading corporations:

  • PTT Plc                                   @ 26.12 billion baht
  • Siam Cement Plc                    @ 25.00 billion baht
  • Toyota Leasing                       @ 20.72 billion baht
  • Berli Jucker Plc                      @ 17.92 billion baht
  • True Move H                          @ 17.80 billion baht
  • CP Food Plc                            @ 16.26 billion baht
  • Land & Houses Plc                 @ 13.00 billion baht 
  • CP All Plc                               @ 12.29 billion baht
  • True Corp Plc                         @ 12.231 billion baht
  • Ratchathani Leasing Plc         @ 11.175 billion baht
  • Bank of Ayudhya Plc             @ 10.00 billion baht
  • Thai Airways Plc                    @ 9.085 billion baht
  • Quality Houses Plc                 @ 8.00 billion baht
  • Tisco Plc                                 @ 8.00 billion baht
  • Pruksa Holding Plc                 @ 7.10 billion baht

What is striking is the fact that CP Group, Thailand’s largest agricultural conglomerate, has a total of 58.58 billion baht of outstanding bonds that are maturing in 2020.

Why Rescue company that mismanage their funds

CP Group, which recently completed a $10.6 billion purchase of Tesco Lotus’ operations in Thailand and Tesco’s operations in Malaysia, accounts for 12.38 per cent of the total bonds maturing in Thailand during 2020.

Although nobody doubts the business acumen of CP Group as they have demonstrated over the years how well they can grow and expand Thailand’s brand across the world, the recent moves by the group begs to question why the Thai taxpayers should or be willing to rescue this firm.

Take for example the list above of the companies looking to buy-back their shares and the list of companies that have outstanding bonds maturing in 2020. Do you see any common names?

Corporate                                Bond Maturing                       Share-buy-back program amount

True Move H                          17.80 billion baht                    N/A

True Corp Plc                         12.231 billion baht                  1.5 billion baht

CP Food Plc                            16.26 billion baht                    10.0 billion baht

CP All Plc                               12.29 billion baht                    13.0 billion baht

CP Pokphand Plc (HK)           2.407 billion shares or about 6.5 billion baht worth of shares

TOTAL           –                       58.58 billion baht                    31 billion baht

CP Pokphand Plc is a Hong Kong listed company that is 52.24% owned by Charoen Pokphand Food Plc (listed on SET) and CP Pokphand (HK) on April 24, 2020 that it would buy back shares to the tune of 10% of the 24.07 billion shares outstanding in the market.

Link to source here.

To illustrate the point, BOT’s move to allow companies to sell at least 50 percent of the maturing bonds in the open market for them to be eligible to get the central bank’s assistance is useless in this case because CP Group is using 53 per cent of its funds to buy-back its own shares.

If 31 billion baht is going to be spent on the share-buy-back, which is not its purpose, and be used to repay the debts of CP Group, then the refinancing part would be a mere 27.58 billion and CP Group would easily be able to refinance.

This is not taking into account the fact that the dividend payouts are not being taken into consideration because if the dividend payments are not undertaken then the funding requirements would be far less.

As of Friday (April 24) filing to the various stock exchanges where these companies are listed, the indication is that:

  • CP Food Plc is set to give out a total of 3.44 billion baht as final dividend after it paid 2.58 billion baht in interim dividend in September 2019.
  • CP All is set to pay a dividend of 11.23 billion baht, while TRUE is set to pay 3 billion baht. 
  • CP Food Plc. is also set to receive 1.26 billion baht in dividend income from its 52.24 per cent held subsidiary, CP Pokphand in Hong Kong, as this company is set to give out a total of 2.42 billion baht in dividends.

The total dividend income that is set to be given out equates to 18.93 billion baht. 

Now add 18.93 to the 31 billion in stock-buy-back and you will get a total of 49.93 billion baht.

Now subtract the 58.58 billion baht that these companies have in bonds that are maturing in 2020 and the answer is a shortfall of 8.65 billion baht.

Global Standards

The global outrage against companies looking to tap the state coffers has seen a sharp increase over the past few weeks as the general public questions the wit of offering to help corporations in this time of crisis.

Criticism of global online money minting machine, such as  booking.com, prompted the Dutch government to tighten its rules on how much support a company can get from the state and what kind of companies are eligible for such help.

Booking Holdings Inc., the parent company of Booking.com, had over the years spent close to $16 billion in share-buy-back and is now seeking state support as the travel industry goes into a tailspin.

Booking Holdings Inc. is not alone. Many of the airlines in the United States and other countries have undertaken similar measures and are now facing the wrath of the public for not being prudent about their management of the balance sheet.

In Thailand as well, CP Group is not alone. It is the fact that CP is the largest conglomerate and has one of the highest share-buy-back plans, and therefore, it has become the center of attraction for criticism against using state funds to help big corporations.

The moves by the BOT is not bad in itself but the BOT needs to be more cautious about using tax payers’ money in a way that will not cost the country in the future just to bail out a large-scale corporation.

The crisis of 1997 should remind us all that one needs to be very careful in the way state assistance is used. If corporations continue to be frivolous, it is not a job for the state to intervene.

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