A 99% stock crash and shocking default set alarms in Thailand

(Bloomberg) – Just a year ago, Stark Corp. like a success story of a Thai company. Backed by a wealthy local businessman, the nearly $2 billion electric cable maker was an aggressive buyer making its first major foray beyond Asia.

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Today, Stark has become one of the top financial concerns in Southeast Asia's second largest economy. The company, embroiled in an accounting scandal, has lost 99% of its market cap and has defaulted on some of its 39 billion baht ($1.1 billion) in debt.

Amid doubts about the company's survival, asset managers have pulled out of bonds issued by lower-rated Thai companies and the country's finance minister has urged regulators to restore market confidence.

The incident has heightened scrutiny of hidden financial risks in Thailand at a time when investors are concerned about a political impasse following last month's general election. The country's benchmark stock index has fallen about 10% this year to levels last seen in 2021, while foreign investors have drained more than $3 billion from Thai stocks.

“The Stark incident has certainly had an impact on investor confidence as they now take a very cautious approach to investment decisions. They are less sure which companies have good or bad governance,” said Niwes Hemvachiravarakorn, investor and founder of Thai Value Investor Club. “Stark was audited by one of the world's leading accounting firms, but the auditors failed to spot the irregularities before they imploded.”

Takeover Spree

Stark's origins date back to 1990 when the company was founded as a comic book publisher and distributor called Siam Inter Multimedia Pcl. The company changed its name to Stark Corp in 2019. Pcl, about a year after Vonnarat Tangkaravakoon, a businessman from one of Thailand's wealthiest families, took majority control of the company. According to data from Bloomberg, Vonnarat was Stark's largest shareholder as of October with a 45% stake.

Vonnarat's acquisition of cable manufacturer Phelps Dodge International (Thailand) Ltd., originally the Thai operation of US-based Phelps Dodge International, transformed the media and publishing company into a manufacturer of electrical wires and components.

Now 51, he is the eldest son of Prachak Tangkaravakoon, who founded TOA Paint Pcl, Thailand's largest paint manufacturer. Vonnarat was Toa's managing director from 1998 until his resignation last month. He also held a 9% stake in TOA, according to the site, although the company denies any relationship with Stark in terms of investment or management.

Under Vonnarat, Stark continued its rapid growth through acquisitions, including industrial products companies in Vietnam. In May last year, the company announced a €560 million deal to buy Leoni Business Group Automotive Cable Solutions, a German manufacturer of automotive cable solutions, its first major expansion outside of Asia. He did not respond to Bloomberg's questions to his rep at Stark.

The first sign of trouble for most investors came in December, when Stark announced that he was exiting the Leoni deal. While the company raised 5.58 billion baht from investors including Credit Suisse and HSBC Holdings Plc to fund the deal, it said it intends to use the money for other purposes. Leoni AG and Leoni Bordnetz-Systeme GmbH are demanding compensation of EUR 608 million.

In February, the CEO suddenly resigned for personal reasons. Later that month, the company said it would miss the March 1 deadline to file its financial statements, citing “some information” being reviewed by its auditor. The shares were suspended and its chairman Chanin Yensudchai and other board members soon resigned.

accounting scandal

When Stark asked his investors at the end of May not to delay his financial report any further, mistrust was high. Investors in two bonds totaling 2.24 billion baht demanded immediate payment of principal and interest. Shares of Stark plunged 92% on June 1, the first day of trading after a more than two-month pause in trading. This also resulted in a cross-default on the Company's other bonds and loans.

Most investors learned the extent of Stark's troubles on June 16, when the company finally released its financial statements, which showed a net loss of 6.61 billion baht for 2022, after an adjusted loss of 5.97 billion baht for 2021. The The company, which originally reported profits of 2.78 billion baht for 2021, said it found “multiple errors” in previous statements. At the same time, details of a special audit carried out by PricewaterhouseCoopers were announced, which revealed various irregularities.

Findings included 202 “unusual sales transactions” worth 8 billion baht in 2022 and 3.59 billion baht in 2021. These included fake “payer names and payments on behalf of clients from accounts owned by former company executives.”

On Tuesday, holders of three more series of bonds maturing between 2024 and 2025, totaling 6.95 billion baht, demanded immediate payment, compounding Stark's financial woes. They require the company to pay principal and interest by July 20. Adisorn Songkhla Co., a subsidiary of Stark, also defaulted on three bonds worth 127 million baht on June 1.

Stark's shares have fallen to near zero, falling to about $11 million from a peak of over $1.7 billion last year. Stark admitted last week that he had doubts “about the continuation of the group”.

As of December 31, Stark had debts of about 39 billion baht, most of which were bonds, loans and trade credits. The company also reported negative equity of 4.4 billion baht as total liabilities exceeded assets.

A list of Stark's securities:

Somjin Sornpaisarn, the president of the Thai Bond Market Association, said Thursday that Stark should be viewed as an isolated case as his troubles stemmed from poor governance.

But the biggest default since state-controlled Thai Airways International Pcl filed for a debt restructuring in 2020 has raised concerns about the broader market, particularly riskier Thai bonds. According to the TBMA, investors are now shying away from riskier bond sales because they fear issuers may default on their repayments. Since Stark's bankruptcy announcement on June 1, several companies with sub-investment grade ratings or no assessed creditworthiness have missed their bond sales targets.

The regulators are trying to boost confidence in the market.

The Securities & Exchange Commission has ordered Stark to conduct a special audit. The Stock Exchange of Thailand plans to tighten rules for companies seeking backdoor listings, like Stark's move in 2019 to list indirectly through Siam Inter Multimedia. The exchange may also issue further alerts for companies with deteriorating financial results, such as sustained losses, and when auditors express reservations about financial reports.

Treasury Secretary Arkhom Termpittayapaisith met with regulators on Thursday to call for speedy investigations. He also said law enforcement agencies must file charges against people found to have broken laws.

Meanwhile, Stark anticipates more pressure from creditors. Asia Plus Securities Pcl, an investor representative for bonds maturing in 2024 with a total face value of 3.93 billion baht, said it will exercise its legal rights if Stark fails to pay by the due date.

Other financial creditors may follow suit and try to expedite repayments, Stark said on Wednesday, adding that a settlement was being considered.

(Adds Finance Minister's remarks)

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