When it comes to meeting their funding needs, many of Asia's largest companies often have to choose between their domestic bond market, the offshore bond market, local bank loans or the international syndicated loan market — or a combination of these.
Philippine conglomerate the Ayala Corporation, which has interests in sectors from real estate to telecoms, is just such a company. Ayala has tapped the offshore bond market through its Globe Telecom subsidiary in 2002 and 2004. Globe has also used the syndicated loan markets to raise both dollars and pesos.
But in December last year, Ayala won plaudits for developing the domestic bond market with a Ps7bn five year deal — the biggest yet in the Philippine corporate bond market. BDO Capital & Investment, BPI Capital, First Metro Investment Corp, ING, Land Bank of the Philippines, PCI Capital and Standard Chartered managed the deal, which was increased from Ps5bn.
Adam Harper spoke to Ramon Opulencia, managing director and senior assistant treasurer of Ayala in Manila, about the decisions a borrower like Ayala has to make, the relative risks of going onshore and offshore and why Ayala made the effort to test the peso bond market's capacity.
What are the respective advantages of the offshore and domestic bond markets?
Ramon Opulencia, Ayala Corp: For the Ayala Corporation, we have to look at what purpose we are borrowing for. Our borrowings are really for domestic uses such as investment in our subsidiaries such as Globe Telecom and Bank of the Philippine Islands so that they can strengthen their positions in their respective industries.
The requirement is peso-based, so that is really our currency of choice. To that extent, the domestic market is really very advantageous.
But, as you know, the peso market is beset with a number of structural weaknesses, including the size of deals available and the single borrower limit, which limits banks' exposure to certain groups of companies. There is also a lack of tenor available — most of the market is at the short end of the curve, mostly because of the volatile history of the Philippines' financial markets.
These factors don't allow us to source the kind of size, instrument and tenor required for our use. Because of this, we are forced to look at the offshore market for funding. At one point, we amassed over $1bn of debt, with some 90% of it denominated in dollars.
The offshore market offers certain advantages, including size and tenor — it's easy to issue $100m-$200m at five years and beyond. There is also a greater variety of products, there is speed of execution and there is a broader investor base.
But, being offshore, you are exposed to foreign currency risk and sourcing risk for foreign currency. So we source most of our requirement offshore and hedge it almost completely into pesos.
What made you decide to accept the extra cost of issuing a domestic bond with your Ps7bn bond last December?
Opulencia: We had a big maturity approaching in January and we thought it would be a good time to do a landmark peso deal. It was aimed at testing the capacity of the market.
In the past, most transactions were around Ps1bn and were Ps3bn at most. One reason for this is that the market is dominated by government bonds and there is no scarcity of paper at any particular tenor.
We knew that, as a group, we were a major user of capital and that it was in our best interests to develop this market in the long term. Given our comfortable liquidity position, we used this opportunity to issue the equivalent of $100m — the normal size that we would do offshore.
As I mentioned, we are a major user of pesos and we only go offshore because the peso market can't supply the financing we need. Also, the bank market was already nearly full on our credit. This is partly because, as a group, we are treated collectively as a single credit and share a single borrower limit, even though the subsidiaries deserve to be treated separately.
If we were to look at an offshore transaction and hedge it completely into pesos, the inefficiency of hedging is such that it would be cheaper to borrow onshore at the rate we did than go offshore for either a bond or a loan and then fully hedge it. It is more rational for us to look at fixed rate peso funding — it mitigates foreign currency risk.
In this context, you always have to look at regulatory risk. Given the inefficiency and stage of development of the hedging market in the Philippines, there is a large amount of regulatory risk associated with a hedge transaction here. At one point, the regulator put a cap of six months on the tenor of a hedge that could be offered to an institution like us — that shows the inherent risks for borrowers in the offshore markets.
Also, if you look at the Philippines' yield curve, although it is steep, it is probably still at an all time low in terms of interest rates.
That bond achieved a placement of more than 40% with retail investors. What did you have to do to make that happen? Is it a model that other issuers could follow?
Opulencia: This transaction opened the eyes of underwriters and investors as to what a good name could achieve in the market. As long as you have a good reputation and the deal is structured and executed correctly, you can achieve good sized deals in the domestic market.
This has encouraged us to look at more transactions involving the peso market in the future. It allows is to improve our risk profile and liabilities while contributing to the development of market which, in future, will be helpful to Ayala Corp and the rest of industry as well.
The transaction was designed to open the domestic market to big issuance and show that, with a lot of effort, and a well thought out process, it can be done.
Do you believe that the domestic bond market in the Philippines will ever be able to rival the dominance of bank loans?
Opulencia: Most borrowers are in the bank market because, given the history of the Philippines capital market, there is a very high premium for issues with a long tenor in the bond market. We would even have preferred loans in the past — they are obviously floating rate and the element of interest rate risk is very manageable.
Loans have certain advantages over bonds but we have to continue to improve the bond market.
The bank market has limits on its exposure to certain groups and, at the same time, there is appetite for investment in the bond market that needs to be satisfied.
Issuers, investors and regulators should work together at revitalising the peso market.
What changes to infrastructure are necessary if the Philippines market is to develop further?
Opulencia: The regulators are on the right track in terms of starting all the discussions that they have on distribution, price discovery and custodianship. It has all helped.
Do you expect the offshore markets to remain the most attractive alternative to bank loans for now?
Opulencia: The offshore markets are attractive for all the reasons I gave earlier — size, tenor, speed of execution and so on. But bank loans are also attractive — you just have to balance it out. Perhaps Philippine corporates will concentrate on bank loans and tap the offshore market to top up their requirements.
I don't see a major move into the domestic bond market for now — it's really quite small and even selling that Ps7bn bond was quite an effort. But I think you will see some more corporates move into the market when they have the flexibility to do so. But first they have to create that flexibility like we did — you have to work hard to set it up because the process is not as quick or efficient as it is in the offshore market.