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Published on August 8, 2007

BankThai is likely to set aside more provisions in the second half of the year to cover its investment in sub-prime loans via collateralised debt obligations (CDOs), following advice from its auditor in the second quarter to set aside Bt276 million to cover similar investments.

President Phirasilp Supapholsiri yesterday said surplus liquidity had pressured BankThai to invest in higher-risk financial products called CDOs. The additional loan-loss provision for the investment in the second half will depend on suggestions from the bank's shareholders and auditor. Proposals will be considered at a BankThai executive board meeting on August 29.

In the second quarter, the bank set aside loan-loss reserves of Bt276 million as per its auditor's recommendations, in order to cover its investment in Coriolanus Series 39 CDOs.

Loan-loss provisions for CDO investment are included in the bank's report to the Financial Institutions Development Fund (FIDF), its major shareholder, for investment examination.

Phirasilp said the bank was a long-term investor and would hold the financial products until their due date in 2013. As a result, the bank is not facing a significant risk by making the investment. Right now, it is affected only by unrealised losses, which differ from hedge-fund investors, who normally invest in the short term, he said.

The bank has been investing in CDOs since 2005, after receiving compensation of about Bt70 billion from the FIDF for management of covered asset pools. This led to excessive liquidity, so the bank decided to invest in several financial products, both domestic and foreign, including CDOs.

The coupon rate for CDOs is quite high, with an average rate equalling the London Interbank Offering Rate (Libor) plus 4.35 per cent. The Libor currently stands at 5.5 per cent per year. BankThai has invested in CDOs that have invested in sub-prime loans with a return of about Libor plus 3.5 per cent.

CDOs are a structured product issued by a special-purpose vehicle and backed by assets in various industries in different countries or regions. The asset backing can be a credit account, such as a mortgage-loan account, a cash-flow CDO or a synthetic CDO. The asset backing reflects upon the credit rating of each CDO.

Phirasilp said BankThai had invested Bt14.46 billion in 14 CDOs, accounting for 6.48 per cent of the bank's total assets of Bt223.31 billion.

Of the 14 CDOs, one is a sub-prime CDO backed by US mortgage debt, or a synthetic residential-mortgage-backed securities CDO. The bank has also invested about US$50 million (Bt1.69 billion) - or about 0.7 per cent of its total present assets - in a CDO named Coriolanus Series

39, that earlier gained a credit rating of BBB+. The rating was later downgraded to BBB-, because of market volatility.

Somruedi Banchongduang

The Nation