Surging Rates, Recession Concerns, Investor Risk Aversion, Spark Thai Bond Market Turmoil

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Thailand’s bond market is now grappling with the tightening grip of the credit crunch, as yet another company, JKN Global Group Plc (JKN), has made the distressing announcement that it will be unable to fulfill its debt obligations due on September 1st.

This unfortunate event marks the second instance of a company defaulting on bond payments. In March of this year, Stark Corporation Plc (STARK) declared its inability to meet its bond repayments. This initial default by STARK set off a chain reaction, uncovering a series of undisclosed financial activities occurring beneath the surface of the company.

The interplay of rising interest rates, reduced liquidity, and a growing inclination among investors toward risk aversion have all contributed to the impending possibility of a default for JKN.

Global interest rates are on the rise, stoking concerns of a potential recession and consequently tightening the liquidity in a society that was once awash with freely available cash. This shift in conditions has led investors to exercise caution in their investment choices. This might explain why JKN managed to secure only 156 million Baht out of the required 609 million Baht by the September 1st deadline.

Reports suggest that JKN made strenuous efforts to secure funding from individual investors, but encountered obstacles due to legal complexities and differing conditions set by both parties’ management teams.

Notably, JKN, which just last year garnered international attention by acquiring the rights to the Miss Universe pageant for a substantial sum of US$20 million in October 2022, has disclosed its decision to default on its outstanding bonds totaling more than 609 million Baht.

Jakkaphong Jakrajutatip, the CEO of JKN, stated, “The Company (JKN) has faced challenges in fully repaying the principal and interest to the debenture holders by the stipulated maturity date. Consequently, the Company plans to make a partial repayment amounting to 146,618,630.14 Baht in principal and 9,981,369.86 Baht in interest, totaling 156,600,000 Baht on the maturity date of September 1, 2023. This transaction will result in an outstanding balance of 443,400,000 Baht.”

The news of the default had a pronounced impact on the stock price, causing JKN shares to plummet at market open, ending the day at 1.70, a decline of 28.57%. The trading activity was substantial, with 196 million shares worth 341 million Baht changing hands.

Consequently, a meeting of bondholders is scheduled for September 29th to deliberate on the course of action regarding the defaulted bond payments.

JKN’s financial obligations extend to more than 3.36 billion Baht over the coming months and into 2024.

A significant challenge faced by JKN pertains to the presence of a ‘cross default’ provision in other bonds maturing within the next year, with the final one due on August 10, 2024. A cross-default situation emerges when a borrower defaults on any obligation, triggering a ‘call default’ in other bonds. This implies that investors in bonds that haven’t defaulted yet can also face early redemption.

Murky Future

Experts in the bond market warn that the problems witnessed by JKN and STARK might merely be indicative of a larger issue, with numerous companies potentially on the brink of default due to the liquidity crunch.

The era of easy access to low-cost funding that fueled the expansion of various businesses, even those without relevant expertise, is coming to an end. Many such companies are now grappling with the consequences of their ill-fated expansion strategies, as cash flows prove insufficient to sustain operations.

With JKN’s market capitalization (which experienced a 30% decline in the previous day’s trading) now standing at a modest 2.5 billion Baht, it is evident that the core aspects of the company failed to generate excitement to maintain high valuations.

In an effort to bolster its profile, JKN pursued the acquisition of Miss Universe pageant rights, with beauty contestants making appearances at social gatherings in Bangkok alongside the CEO. The next Miss Universe event is scheduled for November 18, 2023, in El Salvador. Jakkaphong believes this event will yield sufficient cash flow to cover the bondholders’ debts due on September 1.

Nonetheless, market sentiments are fickle and volatile. Against the backdrop of a slowing global economy and apprehensive bondholders in the wake of STARK’s default, the prospects of taking risks remain dim. This precarious situation could spell doom for JKN, according to industry insiders.

Moreover, the problem could be exacerbated due to the revelation that BNP Paribas (Singapore) branch holds 31 million shares of JKN. Typically, such holdings imply that BNP is safeguarding shares on behalf of an entity committed to maintaining the share price above a certain threshold. Should the share price dip below this threshold, the bank could require additional funds as margin, compelling the shares’ holder to inject more capital or risk the bank liquidating the shares in the open market.

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