Thai Construction behemoth Italian-Thai Development Plc (ITD) fights for survival amid a growing financial crisis. Intense negotiations are ongoing. Worker wages in limbo. Government and banks are on edge. Will Italian-Thai weather this storm as it did previously in 1997?

Intensive negotiations are underway to secure the future of Thailand’s top construction firm Italian-Thai Development plc (ITD). At this time, the focus is on securing a financial lifeline for the firm to pay outstanding salaries by the end of April. The firm shocked Thailand’s financial market in January when it deferred ฿14.45 billion in bond repayments for two years. Similarly, with a flood of complaints over unpaid wages, the Ministry of Labour has now been forced to intervene. The firm recently requested an extension to file its financial statements for the year 2023 after its auditors refused to sign off on the accounts, citing the need for a review. The huge construction behemoth, established in Thailand in 1958, has been a key player in the kingdom’s economy and industrial development since. Its current predicament and financial distress could also certainly spell wider problems for Thailand’s economy.

The President of Italian-Thai Development Plc Premchai Karnasuta. His construction firm is the largest in Thailand. However, it is burdened with liabilities of ฿106 billion in a gathering financial storm which has seen it unable to pay wages. Mr Premchai was jailed by a Thai court in 2020 for illegal poaching. He was later released on parole in October 2023 on health grounds.

There are rising fears that Thailand could be facing a private-sector debt crisis. It comes as the country’s leading construction firm fights for survival.

Established in 1958 as a partnership between a Thai businessman and an Italian, the Italian Thai Development Corporation has played a key role in developing the country’s infrastructure.

However, since 2015, the firm has posted consistent losses amounting to billions of baht. The scale of the problem can be seen from the value of its net assets. In the last year, this has fallen by half.

The firm is currently valued on the stock exchange at ฿4.5 billion.

Total liabilities of the construction giant amount to a whopping ฿106 billion including at least ฿24 billion to top Thai banks. More owed to bondholders

At the same time, it is labouring under liabilities estimated in 2024 at ฿106 billion. This, it is understood, includes all financial and trade debts.

Earlier this year, it postponed bond repayments totalling ฿14.45 billion for two years. The move caused a sharp negative reaction in Bangkok’s financial circles.

For instance, Deputy Minister of Finance Julapun Amornvivat even suggested an emergency government fund to shore up investor confidence in the bond market.

Government closely monitoring Thailand’s corporate sector bond market. Fears of a pending crisis

Thai firms, in the last decade, like their counterparts in China, had begun to rely heavily on this source of finance.

In short, it is now drying up along with the concept of cheap money.

Furthermore, attention is being paid to the level of exposure on Thailand’s bond market. Certainly, it has further spooked investors and contributed to the outflow of capital from the country.

Thailand is facing the very real prospect of a credit downgrade this year as financial experts look warily at the rising threat to the country’s banks from the private sector.

Thai banks are anxious to keep Italian-Thai afloat given its government-funded contracts despite reports of wages not paid to over twenty thousand workers

Nevertheless, the top banks in Thailand are scrambling to keep Italian-Thai afloat.

So much so that there have been intensive talks to provide additional working capital to pay outstanding wages.

This is due to the nature of its extensive construction contracts funded by the government.

For the past few months, over twenty thousand workers with the giant firm have reported problems with wage payments.

Reports from the Ministry of Labour and other agencies suggest that only 20% to 40% of amounts owing were disbursed.

In recent days, Sopha Kiatniracha, the Director-general of the Department of Labour Protection And Welfare at the Labour Ministry commented.

She confided that the government had received complaints from workers nationwide about the Italian-Thai firm and late wage payments. At the same time, the firm had been both warned and ordered to facilitate outstanding payment without delay.

Italian-Thai Development plc (ITD) is one of Thailand’s largest construction firms. It is certainly dealing at this time with a severe financial crisis.

In brief, this is now common knowledge along with the delayed payments to its workforce and subcontractors. 

Firm is in talks with its bankers seeking a credit line to pay wages and salaries at the end of April 2024. Italian-Thai paid 6,626 workers last Thursday

Labor Minister Phiphat Ratchakitprakarn announced on Monday that the firm is seeking financial assistance from banks to settle overdue salaries. 

The firm reportedly has 20,188 employees who are due to be fully paid by the end of April. 

The minister explained that discussions are ongoing with financial institutions.

Last Thursday, Minister Phiphat confirmed that 6,626 workers including Thais and migrant labourers, were paid by Italian-Thai.

These payments are related to sites in Bangkok, Rayong, Pathum Thani, Chiang Mai and Nakhon Ratchasima. The money came from a short-term facility of ฿30 million.

The payment of salaries last week comes as the firm negotiates with its lenders to find a more durable lifeline.

The scale of the firm’s operations means that the Thai banking sector is exposed if it fails.

At length, there is an exposure of at least ฿24 billion to the country’s main banks including Bangkok Bank and Krungthai Bank. Lenders also include Kasikorn Bank and Siam Commercial Bank. 

50% of the ฿24 billion in exposure to Thai banks is unsecured according to sources. The firm’s indebtedness is a factor that will weigh on bank profits

It is estimated that approximately 50% of this debt is unsecured. In truth, the figure may be higher depending on the true value of the securities pledged to the institutions.

Analysts in Bangkok already agree that the fate of Italian-Thai will impact bank profits this year.

However, it is thought that the main banks have provided adequate bad debt provisions and reserves to be able to deal with any eventuality.

In recent days, Bualuang Securities (BLS) in Bangkok gave its analysis on the development of this important financial story.

‘BLS believes this issue will have an impact on Italian-Thai’s creditor banks and is a factor that could pressure share prices in the short term,’ said a top analyst at the firm. ‘As a result, we think the banks should be able to manage such risk.’ 

In response, the Ministry of Finance has initiated intensive monitoring of the situation. It is aware of the potential impact on banking institutions and investor confidence. 

Deputy Minister of Finance Julapun Amornvivat had already hinted at the possibility of establishing an emergency fund to address a potential crisis in the bond market.

Furthermore, the liquidity crunch facing Italian-Thai has significant implications for the banking sector.

Basically, the four major banks involved are facing potential profit reductions if Italian-Thai’s loans turn non-performing.

Wider economic impact could morph into a precarious situation given the scale of the firm’s activities and its participation in the sensitive bond market

Bualuang Securities (BLS) estimates a decrease in net profits ranging from 2.6% to 4% for these banks.

In short, this is if Italian-Thai’s debts become classified as non-performing loans (NPLs). This is notwithstanding other potential developments if the firm were to fail.

Despite reassurances from analysts that banks have likely allocated reserves to mitigate the risk, the wider situation remains precarious.

TRIS Rating has, in the meantime, issued a negative credit alert on Italian-Thai’s business. In short, it cites concerns about its financial position and bond maturity extensions.

The company’s financial woes stem from a combination of factors.

They include losses incurred from overseas projects and delayed payments due to a nationwide cash crunch.

Italian-Thai’s cumulative loss of ฿6 billion from 2020 to 2022, coupled with a total debt of ฿108 billion, underlines the severity of the situation.

Failure to file 2023 statements on time as firm loses ฿6 billion from 2020 to 2022 alone. Auditors are reviewing the firm’s activities before signing off

The firm failed to meet a Stock Exchange of Thailand (SET) deadline for filing its 2023 results. Previously, it asked the exchange to extend the deadline to March 29th 2024. In brief, the firm cited a review by its auditors.

A reticence by auditors to sign a firm’s accounts is often a preliminary indication of potential failure. In short, this happened also with Thai Airways before it sought bankruptcy protection in May 2022. 

It stems from fears by auditors of exposure in the event of a business collapse. Regarding this case, it may also be linked to the vast array of projects handled by the firm across Southeast Asia.

In August 2020, Thai Airways auditors Deloitte Touche Tohmatsu Jaiyos Co Ltd refused to sign off on that firm’s accounts due to ‘material uncertainty’. In short, this was over the airline’s lack of capital.

Italian-Thai has contracts across Thailand as well as India, Taiwan and war-torn Myanmar. Its turnover for the first nine months of 2023 was ฿47 billion

Italian-Thai, in addition, to sites across Thailand, has ongoing projects in India, Taiwan and significantly, in war-torn Myanmar. In the meantime, it cited an income for the first nine months of 2023 at ฿47 billion and a reported net loss of ฿45 million for the period.

‘We have been in close discussion with related parties about Italian-Thai,’ confirmed Ms Pornanong Budsaratragoon on Monday, 11th March 2024. Ms Pornanong is the secretary-general of the Securities and Exchange Commission (SEC). ‘The impact will probably be much greater than other cases if the company really has financial trouble given its size.’

Shares in the firm have meanwhile halved in value from ฿1.69 to ฿0.85 over the last year.

This values Italian-Thai at ฿4.5 billion. In view of this, it must be said that the firm appears more tenable than Thai Airways did in 2020. 

Thailand’s stock market is, additionally, currently experiencing a crisis of confidence.

Crisis of confidence on domestic financial markets as the Stock Exchange of Thailand (SET) fell by 15.15% in 2023 along with Chinese bourses amid a fraud scandal

The scandal surrounding the Stark Corporation including an alleged ฿15 billion fraud and criminal investigations has already made investors wary. At the same time, there is concern that Thailand may be experiencing a liquidity crisis quite similar to that seen in China.

Downside to closer ties between China and Thailand. It is not just the criminality threat but also that Thailand is the net loser in trade between the two 

In short, in 2023, the Stock Exchange of Thailand (SET) in Bangkok dropped 15.15%. Similarly, the Shanghai SE B Share Index fell by 17.87% in the same period. 

In contrast, the stock market in Taiwan rose by 16%, South Korea by 12.9% and India’s bourse surged by a record 16.7%. 

Efforts to address Italian-Thai’s future involve negotiations with financial institutions for additional liquidity and debt restructuring. However, the impact extends beyond the major firm’s financial struggles. 

The real concern for the government, at this time, is the potential broader implications for Thailand’s construction industry and economy.

State agencies including regulators and those with oversight of Italian-Thai contracts monitor the situation. Concern for investors in the troubled firm

Government agencies overseeing projects linked with Italian-Thai Development include the Expressway Authority of Thailand (EXAT) and the State Railway of Thailand (SRT).

Executives at the state agencies are closely monitoring developments. In short, they seek to ensure project timelines are met. While Italian-Thai’s financial troubles have not directly impacted ongoing projects, the situation remains fluid.

The uncertainty surrounding Italian-Thai’s financial stability has prompted calls for increased regulatory oversight and investor protection measures. 

The Securities and Exchange Commission (SEC) is actively engaging with stakeholders. It is trying to assess the potential fallout from Italian-Thai’s crisis and implement safeguards against any potential risk to investors.

Nevertheless, the partnership formed nearly seventy years ago between a foreigner and a Thai retains tremendous goodwill in the kingdom.

Friendship forged in 1958 after a Chao Phraya River salvage project linked with sunken ships. Laid the foundation for Thailand’s largest construction firm

Italian-Thai Development Corporation Limited (Italian-Thai) came about as the result of an enduring friendship between Dr Chaijudh Karnasuta and Mr Giorgio Berlingieri. This was back in the 1950s when Thailand was still an agricultural economy with plans to industrialise.

The partnership was the result of a joint operation in salvaging five ships sunk in the Chao Phraya River. In short, this laid the foundation for the company’s inception on August 15, 1958. 

With an initial registered capital of ฿2 million, Italian-Thai embarked on a journey of growth and transformation.

In effect, it was part of the shaping of Thailand’s infrastructure landscape over the coming decades.

In 1994, Italian-Thai marked a significant milestone by becoming publicly listed on the Stock Exchange of Thailand. This saw the creation of the Italian-Thai Development Public Company Limited with a registered capital of ฿2.5 billion. 

Over the years, the company’s steady growth has been reflected in its increased registered capital, which now stands at ฿6.33792 billion. ฿5.27984 billion of this is paid up.

1997 financial crisis saw Italian-Thai enter a business rehabilitation process. Certainly, it shows how the firm’s fortune is linked to the Thai economy

However, Italian-Thai’s path to success was not without challenges. The financial crisis that swept through Thailand in 1997 dealt a severe blow to the firm. Consequently, it entered a business rehabilitation process.

Despite these obstacles, Italian-Thai emerged stronger, laying the groundwork for future growth and resilience.

By the end of 2003, Italian-Thai had solidified its position as the largest infrastructure construction company in Thailand. Indeed it was, at the same time, one of the largest in Southeast Asia, with a turnover of ฿18.330 billion.

Among Italian-Thai’s notable achievements is the construction of Suvarnabhumi International Airport, a project of immense significance. 

Large infrastructural projects bear testimony to Thailand’s rapid development in the last twenty years

Thailand’s main airport, the brainchild of ex-premier Thaksin Shinawatra, is situated approximately 25 km east of Bangkok. Completed in 2006, this project exemplifies Italian-Thai’s commitment to excellence and its ability to deliver complex infrastructure projects on schedule.

In addition to Suvarnabhumi International Airport, Italian-Thai undertook a diverse portfolio of projects across various sectors. From double-track railways and low-cost housing projects to high-voltage transmission lines and mining ventures, Italian-Thai has demonstrated its versatility. It has proven expertise in executing projects of varying scales and complexities.

Notably, Italian-Thai has been involved in the creation of Thailand’s extensive mass transit infrastructure. In short, this includes the construction of the Bangkok Transit System (BTS) system. In addition, the northern segment of the Mass Rapid Transit (MRT) project. 

Nonetheless, amid the downturn in the firm’s fortunes since 2015, there has also been controversy concerning one of its top executives. 

Top executive jailed in 2021 for poaching

President Premchai Karnasuta was sent to prison in December 2021. In short, he was convicted of wildlife poaching. This included bagging a rare black panther while camping in a jungle area.

The top businessman was only released on parole in October 2023 amid real concerns for his health.

Jim Thompson the original ‘farang’ who ushered in the heyday of the expat in 20th-century Thailand

Mr Premchai is also, notably, a key shareholder in the Mandarin Oriental Bangkok Hotel. The five-star hotel on the Chao Phraya River has historic links with key foreign figures such as the famous American, Jim Thompson.

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