Teesside, a gritty steel-making district in England's northeast, is almost as far removed as you can get from the steamy streets of Bangkok. The two collided this week to inflict the biggest default on Thai bankers since the Asian financial crisis.
Sahaviriya Steel Industries Plc, the Bangkok-based operator of Southeast Asia's largest flat-steel manufacturing complex, reneged on 50 billion baht ($1.4 billion) of loans Monday following the failure of its four-year old UK venture. The group said it was suspending production at the Teesside plant, which employs about 2,000 people, amid a drop in prices and a supply glut stemming from slowing economic growth in China.
Thailand's biggest default since Thai Petrochemical Industry Plc buckled under $3.8 billion of liabilities during the 1997 Asian crisis looks set to knock earnings at Siam Commercial Bank, Krung Thai Bank and Tisco Financial Group, which combined had extended most of credit. As they negotiate a restructuring, the three leading creditors to the company will take a hit to their current quarterly earnings that could, in the case of Tisco at least, wipe out any profit entirely, SCB Securities Co says.
"Sahaviriya Steel overinvested in the UK and steel prices went down continuously from there," said Suchada Pantu, an executive vice-president in Bangkok at Thai Rating & Information Services Co. "They used too much debt because they couldn't issue enough equity and bonds at that time. Now they have to find new partners" to survive, she said.
Sahaviriya Steel partly blames an economic slowdown at home, with consumer confidence declining for an eighth consecutive month in August, as well as a global steel glut caused by China dumping vast quantities of the alloy. Prices for rebar in China, the reinforced steel used in construction, have slumped 63%c from a May 2008 all-time high to the lowest since at least 2003 as local producers flooded the market with record exports, abetting some of the 11 large steel bankruptcies worldwide since 1998.
'Very difficult'
Should all of Sahaviriya Steel's debt become non-performing, bad loans in the banking system will rise to 2.86% of total advances, from 2.46%, Ronadol Numnonda, Bank of Thailand's assistant governor, said in a statement on Sept 22. A level of 2.86% would be the highest since July 2011.
"This will not affect the stability of the overall financial system," he said. "Moreover, the lenders of Sahaviriya already set aside some provisions. This should be sufficient to deal with this debt."
Thai Rating & Information used to rate Sahaviriya Steel at BB+, its highest non-investment grade. It withdrew the rating in October 2011 at the company's request.
"In this age of low steel prices due to Chinese exports, large, efficient mills and high pollution standards, it's very difficult for mills like Teesside to exist," said Kenneth Hoffman, a senior metals and mining analyst with Bloomberg Intelligence. Reduced auto production in the UK also crimped demand, he said.
Siam Commercial Bank will make an extra 10-11 billion baht of provisions to account for the bad Sahaviriya Steel debt, and aims to minimise that blow this quarter by realising 7-8 billion baht of investment gains, it said in a Sept 21 exchange filing.
Provisions made
Krung Thai Bank will allocate another 9 billion baht in addition to the money it's already set aside, and expects to take a 6-billion-baht hit on net profit in the three months to Sept 30, about 70% of what its earnings have averaged every quarter since 2013.
Tisco will make an extra provision of 1.4-1.5 billion baht, an amount that could almost wipe out its earnings this quarter, SCB Securities' research analyst Kittima Sattayapan said in a Sept 22 note.
Sahaviriya Steel, founded in 1990, isn't new to defaults. The group was among Thailand's biggest bad debtors during the Asian financial crisis almost two decades ago, and in 1999 recovered from insolvency as part of a 21-billion-baht debt restructuring programme. Siam Commercial Bank was one of the lead lenders at that time, too. The steel company's market value dropped to 2.25 billion baht on Thursday from as high as 51 billion baht in 2004, according to data compiled by Bloomberg.
The company came to control the Teesside steel plant after purchasing it from India's Tata Steel Ltd in 2011. Even at that time, the plant was losing money. The Viriyaprapaikit family's other companies have included property developer Sahaviriya City Plc and a predecessor company to computer distributor SVOA Plc, which it doesn't have an interest in now. Both defaulted on their debt during the Asian financial crisis.
Losses at the steel group more than doubled to 6.3 billion baht in the first six months of this year from the same period of 2014, the latest financial accounts show. It had 74.3 billion baht of liabilities as of June 30 and 140.5 million baht in cash. The company will also approach other creditors such as suppliers to participate in its rehabilitation plan, chief executive officer Win Viriyaprapaikit said on Sept 21.
"By forcing Sahaviriya Steel to restructure the debt with the banks, it will probably also drag more creditors down with it too," said Maria Lapiz, an analyst at Maybank Kim Eng Securities (Thailand) Plc. "There'll be a lot of people who will be involving in the restructuring."