UPDATE 1-Thailand offers generous terms on $2.4 bln rice bond
* BAAC offers bond at 31-39 BPS over comparable govt bond-IFR
* Bond needed to pay for rice subsidy scheme
* Govt risks losing support of rice farmers
(Recasts with early price guidance, demonstrations)
BANGKOK, Nov 25 (Reuters) - Thailand launched a 75 billion baht ($2.36 billion) bond on Monday that it needs to fund rice subsidies, offering generous terms as it tries to avoid adding fuel to protests in Bangkok.
The government needs the money to pay rice growers, a traditional bastion of support that is at risk as farmers have not been paid for their grain since the subsidy scheme was renewed at the start of October.
About 1,000 anti-government demonstrators forced their way into Thailand's Finance Ministry on Monday and protest leaders called for the occupation of government buildings in an escalating bid to topple Prime Minister Yingluck Shinawatra.
The state Bank of Agriculture and Agricultural Cooperatives (BAAC) will use the bond, its biggest ever, to pay farmers for rice bought at above market prices in a subsidy scheme that has cost the government 680 billion baht so far.
But it was not clear whether it would be able to sell the entire amount on concerns over the cost of the rice scheme and given the political uncertainty.
Underwriters set early price guidance of 31 to 39 basis points over comparable Thai government bonds, according to IFR Markets, a unit of Thomson Reuters.
To attract investors the issue also specifies the government will pay the principal and the interest, unlike BAAC's other outstanding state guaranteed bonds, IFR said.
"I'm not sure if the government can successfully issue this, there's a lot of political concern and the issue size is quite big," said a fund manager with the domestic units of an international asset management firm.
"Normally, 40 basis points over government would be okay but with the situation now?"
Thailand's finance ministry said last week it would borrow from banks or allow them to bid on the unsold portion if institutional interest fell short.
BAAC, which funds the rice scheme, has sold about 123 billion baht ($3.9 billion) of debt this year but had to cancel three auctions last month.
Chularat Suteethorn, director general of the Public Debt Management Office (PDMO), said demand for the bond was "so far, so good." Asked whether BAAC would pull the bond given the demonstrations, Chularat said it was too early to say.
The three-year bond, due November 2016, will be used to pay for the main harvest while a second smaller issue will be needed for the subsequent crop. BAAC is offering the bond at a price guidance of 3.45 percent to 3.53 percent, IFR said.
"I've talked to other fund managers and they also think although the bond is guaranteed by the government, they don't want to support the rice buying scheme because it's not transparent," said a bond dealer at a domestic bank.
Thailand buys rice at 15,000 baht a tonne, well above market rates. The subsidies are popular among farmers whose support swept Shinawatra to power in 2011 in a landslide election.
They are the cornerstone of economic policies aimed at lifting rural incomes to stimulate consumption in the mould of her brother, ousted prime minister Thaksin Shinawatra. He funneled money into villages through cheap loans and a debt moratorium for farmers while in power from 2001 to 2006, creating a knock-on effect on the whole economy.
In the secondary market, the yield on three-year government bonds rose 11 basis points to 3.26 percent on Friday, partly in response to the BAAC offer. It was at 3.23 percent on Monday. ($1=31.8 baht)
(Additional reporting by Satawasin Staporncharnchai and Viparat Jantraprap in Bangkok and Kit Yin Boey in Singapore.; Editing by Jason Szep, Amran Abocar and Michael Urquhart)