A 99% Stock Crash Rings Alarms in Thailand Over STARK Corp

Stark Corp. appeared to be a Thai business success story just a year ago. The roughly $2 billion electrical wire manufacturer, backed by a successful local businessman, was a ruthless acquirer making its first significant foray outside of Asia.

The second-largest economy in Southeast Asia now has Stark Corp as one of its top financial concerns. The company, which is embroiled in an accounting issue, has lost 99% of its market value and has defaulted on part of its liabilities totaling 39 billion baht ($1.1 billion).

Money managers have stayed away from bonds issued by lower-rated Thai corporations as concerns about the company’s viability have grown, and the country’s finance minister has urged regulators to restore market confidence.

The incident has drawn more attention to Thailand’s unreported financial dangers at a time when investors are uneasy about a political standstill following the general election last month. The benchmark market index for the nation has decreased by around 10% this year, reaching lows last seen in 2021, and foreign investors have removed more than $3 billion from Thai stocks.

“Stark’s incident undoubtedly had an effect on investors’ confidence as they are now taking very cautious investment decisions,” said one analyst. According to investor and Thai Value Investor Club founder Niwes Hemvachiravarakorn, “They are less certain about which companies have good or bad governance. One of the greatest accounting companies in the world was auditing Stark, yet the auditors failed to spot the discrepancies prior to their implosion.

Stark was first established in 1990 as Siam Inter Multimedia Pcl, a publisher and distributor of comic books. About a year after Vonnarat Tangkaravakoon, a businessman from one of Thailand’s wealthiest families, acquired majority control of the company, it changed its name to Stark Corp. Pcl. According to information gathered by Bloomberg, Vonnarat held a 45% stake in Stark as of October.

By purchasing cable manufacturer Phelps Dodge International (Thailand) Ltd., formerly the Thai operations of US-based Phelps Dodge International, Vonnarat converted the media and publishing company into a producer of electrical wires and components.

He is the 51-year-old oldest child of Prachak Tangkaravakoon, who established TOA Paint Pcl, the biggest paint manufacturer in Thailand. From 1998 until his retirement this month, Vonnarat served as executive director of Toa. According to TOA’s website, he also owned 9% of the corporation, despite the fact that the latter’s management and investment activities are not acknowledged by TOA.

Stark continued to see rapid growth under Vonnarat through acquisitions, including industrial product companies in Vietnam. It launched its first significant international expansion in May of last year when it agreed to pay €560 million to acquire German automotive cable solutions manufacturer Leoni Business Group Automotive Cable Solutions. He hasn’t responded to Bloomberg’s questions for his Stark representative.

When Stark revealed that it was pulling out of the Leoni acquisition in December, most investors saw that as the first hint of problems. While the business said it planned to use the 5.58 billion baht it raised from investors like Credit Suisse and HSBC Holdings Plc to finance the transaction for other uses, it did so. In exchange, Leoni AG and Leoni Bordnetz-Systeme GmbH sought €608 million in damages.

Its CEO abruptly left the company in February, citing personal reasons. Later that month, claiming “some information” that its auditor was reviewing, the company announced it would miss the March 1 deadline for publishing its financial statement. The company’s Chairman Chanin Yensudchai and other board members soon resigned after the shares were halted.

By the time Stark requested its investors to forego another delay of its financial statement in late May, mistrust was at an all-time high. The principal and interest on two bonds totaling 2.24 billion baht were demanded right away by the investors. On June 1, the first day of trade after more than two months of suspension, Stark’s shares fell 92%. Cross defaults on the company’s other bonds and loans were also a result of it.

On June 16, Stark eventually released its financial accounts, which revealed a net loss of 6.61 billion baht for 2022 following a restated 5.97 billion baht loss for 2021. This was when the majority of investors first learnt the full depth of Stark’s issues. The business stated it found “multiple errors” in earlier announcements after initially estimating a profit of 2.78 billion baht for 2021. In addition, it provided information on a special audit carried out by PricewaterhouseCoopers that uncovered many anomalies.

202 “unusual sale transactions” totaling 8 billion baht in 2022 and 3.59 billion baht in 2021 were among the findings. Included in them were fictitious “payer names and payments on behalf of customers from accounts of the company’s former officers.”

Stark’s financial difficulties were made worse on Tuesday when the holders of three additional series of bonds with 2024–2025 maturities totaling 6.95 billion baht demanded immediate payment. By July 20, they want the business to pay the principal and interest. On June 1, Adisorn Songkhla Co., a subsidiary of Stark, also fell behind on three notes totaling 127 million baht.

Stark’s stock worth has been reduced to only $11 million from its peak of over $1.7 billion last year as a result of the near-zero share price decline. Last Thursday, Stark said that there were concerns “about the Group’s going concern.”

At the end of the year, Stark had liabilities of roughly 39 billion baht, the majority of which were bonds, loans, and trade credit. Due to the fact that liabilities outweighed assets, it also had negative shareholder equity of 4.4 billion baht.

The problems at Stark were the result of bad governance, according to Somjin Sornpaisarn, president of the Thai Bond Market Association, who announced this on Thursday.

The worst default since state-controlled Thai Airways International Pcl filed for debt restructuring in 2020, however, has sparked worries about the market as a whole, particularly in regard to riskier Thai bonds. According to TBMA, investors are currently avoiding riskier bond transactions due to concerns that the issuers may not be able to make repayments. Since Stark’s default notification on June 1, a number of organisations with ratings below investment-grade or without assessed creditability have missed bond-sale goals.

Regulators are working to maintain market trust.

The Securities & Exchange Commission has mandated a special audit by Stark. The Stock Exchange of Thailand intends to impose stricter regulations on businesses looking to list indirectly, like Stark did in 2019 by using Siam Inter Multimedia. The exchange may also issue more warnings in cases where a company’s financial performance is declining, such as when losses continue, or when auditors express doubts regarding financial statements.

Finance Minister Arkhom Termpittayapaisith met with the authorities on Thursday to request quick investigations. Additionally, he stated that individuals who are discovered to have broken the law must face prosecution.

According to a filing by Stark on Friday, the Department of Special Investigation has agreed to look into workers who may have been responsible for the irregularities uncovered during the audit.

Meanwhile, Stark is preparing for more pressure from creditors. Asia Plus Securities Pcl, who represents bondholders for notes with a 3.93 billion baht principal due in 2024, stated that it will take legal action if Stark doesn’t make the payment before the deadline.

Stark stated on Wednesday that it was thinking about entering into negotiations to find a resolution and warned that further financial creditors would attempt to hasten repayment.