Favourable interest rates and the Philippines’ first investment grade rating is providing the country’s top corporations with an additional funding option of borrowing in longer tenors from international investors as these companies expand to take advantage of robust economic growth.
Corporations have traditionally depended on peso-denominated loans and bonds from onshore liquidity, which amounts to about 16% of gross domestic product, to borrow funds. But lower yields are encouraging companies such as San Miguel Corporation to consider issuing US dollar denominated bonds - issuing at the holding company level for the first time - to lock in funding in longer tenors, according to a debt syndicate banker with knowledge of the deal. He added that details on the tenor and volumes have not been announced, although
“The local market is primarily a bank market which is restricted to five years, as is the case in most markets. The offshore market potentially depending on pricing provides longer duration at interesting levels,” said a debt syndicate banker with knowledge of the deal. “So it is a combination of a need for duration and also diversification.”
San Miguel will be meeting investors in Singapore and Hong Kong on April 16 and has mandated Australia and New Zealand Banking Group Limited, Bank of America Merrill Lynch, DBS Bank, Deutsche Bank and Standard Chartered Bank as joint lead managers and joint bookrunners.
SM Investment Corporation may also sell US$600 million in bonds, according to an April 14 report by the Philippine Star. The company has earmarked a record PHP65 billion (US$1.6 billion) in capex for this year to support 12%-15% of annual profit growth by 2015, according to a company filing on the Philippne Stock Exchange on April 15.
“We are always open to considering the US dollar bond as one of the options for funding but will depend on the pricing versus other options. We will announce in due course once there has been a decision made with regard to our funding plans,” said Corazon Guidote, senior vice president for investor relations at SM Investments Corporation.
San Miguel’s deal comes after Philippine corporations such as First Pacific and Megaworld also issued 10-year US dollar bond deals in RegS formats last week. First Pacific issued a US$400 million deal that priced at a 4.5% coupon that attracted US$3 billion from over 160 accounts, while Megaworld sold a US$250 million through a 4.25% coupon, which was the lowest yield for a 10-year corporate in the country.
These deals will be used as comparables to price San Miguel’s deal in addition to JG Summit’s US$750 million, 10-year deal that priced January 16 at a 4.375% coupon, according to another banker on the deal. San Miguel is a better credit than the previous deals so he hopes to price within their coupons, added the banker.
Investors have been seeking shorter tenors of five years for US dollar denominated deals recently to protect against concern that improving economic prospects in the US would prompt interest rates to increase. But investors are less affected by such concerns when it comes to Philippine companies simply because of the lack of supply.
“On the question on whether people are favoring five years, we see the market less fussed than we saw in the past several weeks,” said another debt syndicate banker with information of the San Miguel deal. “The amount of paper or lack of that is coming out of the Phils is one reason for the demand. It’s not so much a matter of precise tenors it’s a matter of what’s available. Only well known and strong names come out of the Phils.”
Philippine corporations issued the most in US dollar bonds in Southeast Asia so far this year according to Dealogic, with issuance topping US$6 billion year-to-date. The country issued a total US$9 billion in 2012, ranking in third after Indonesia and Singapore in the region.
Trading a secondary matter
The lack of liquidity in the secondary markets for Philippine names also fails to deter demand for the credits. Not only are there few credits trading in that sector, but the Philippine sovereign is also not actively traded in the secondary markets, according to one trader who said he pretty much dropped trading that sovereign from his portfolio.
“There’s just not a lot of activity in the Philippine space. There’s a vacuum in terms of the secondary curve,” said the trader. “Previous issues are also small in size, and liquidity is weak because a lot of the demand is taken by domestic investors.”
But the banker said despite these issues, demand for Philippine credits are still quite strong because of bets that economic prospects and more credit upgrades will drive down yields in Philippine credits, which allow investors to safely buy and hold them instead.
Fitch Ratings upgraded the country’s long-term foreign currency issuer default rating on March 27 to ‘BBB-stable’ from ‘BB+’ due to a relatively strong sovereign external balance sheet compared to ‘A’ range peers. More investment grade upgrades are suspected to follow after Standard & Poor’s upgraded the country to ‘BB+’ in July 2012 and Moody’s raised the country’s long-term rating to ‘Ba1’ last October.
The trader said issuance of more credits from the country will help improve liquidity, and bankers certainly are working towards making that happen.
“There’s a fair bit of pitching going on in that country. Right now, it’s a matter of who we can get to come out. There are alternatives for them, they have the loan market to them they have the peso market so it’s really where they are in terms of diversification of their funding sources.”