The Philippines is creating a buzz among debt capital market investors, and the excitement is certainly justifiable.
Bankers say that the universe of Philippine dollar bond issuance is likely to expand throughout all sectors in the coming months from the few property developer names, and what better time to put your money in them than now?
Investors and financial market players expect the sovereign to obtain an investment grade rating for the first time ever in the next 12 months, notwithstanding the fact that the debt capital markets are already pricing the Philippine bonds at two to three notches over investment grade. Gross domestic product not only beat expectations in 2012 but is expected to reach 7% this year, and the stabilising political climate and economy-friendly policies endorsed by President Benigno Aquino is adding to investors’ Philippine fever.
This upside will be well sought after among foreign investors, who will be competing with domestic houses and private banks. This is especially the case for Philippine credits as onshore liquidity, worth some 16% of GDP, is not only enough for most corporations to depend on in the local markets but can also provide strong support for global corporate paper. In the case of JG Summit’s US$750 million, 10-year bond that priced at a 4.375% coupon, onshore investors helped inflate the order books to a whopping US$6.5 billion.
Because of this immense onshore support, Philippine issuers have the luxury of foregoing a credit rating as was the case with JG Summit, ICTSI and Filinvest. Debut issuers like Filinvest can also afford to disseminate its official circular on the day of the deal even at the expense of disgruntling some foreign investors who described it as ‘buying a house without seeing it’ or another investor who said the deal was zipped past them like a ‘drive-by.’
Even though onshore liquidity will continue to increase as the country enjoys a strengthening peso and continual waves of capital inflows, it does raise questions about whether issuers need to take all the steps of a deal. For one thing, the country is facing an unprecedented amount of infrastructure needs which can undoubtedly use the help of the international bond markets. Setting the right precedent can also be worthwhile as more Philippine companies, including unfamiliar ones look to the international bond markets for funding.
For now, obtaining a credit rating may not be advantageous for a Philippine issuer. The rating will be capped by the country’s speculative grade ceiling, which will affect coupon rates that are ranging in the 4%-5% for Philippine corporates. It is probably is a redundant step to many an issuer since they can lock in competitive rates due to the onshore bid.
Yet a credit rating will nevertheless widen the net of investors that can participate in a deal, and an increased number of investors can also help bring pricing tighter. Part of the reason why issuers tap the international bond markets is to diversify its investor base, and as the country becomes more developed and well-known to the international community, it should start thinking of ways to widen its footprint among a various global investors.
Some bankers say that Philippine issuers also tend to have less rigorous investor meetings compared to other Asian companies, according to a banker away from the abovementioned deals. He says they rarely hold full-fledged, one-on-one meetings although they book luncheons and the occasional wall-crossings.
Holding more extensive investor meetings and opening the possibility for rated deals will definitely help garner support from a wider range of investors as they will be able to receive more information about the credit and pricing metrics as well as a justification for funding. Although the usual suspects have been at the forefront of the country’s dollar bond issuers, smaller companies can be at a disadvantage if they follow the same footsteps of larger issuers. In such cases, investor confidence and familiarity with the name is something they will have to plant in investors’ minds.
Philippine issuers do not need to drastically change their way of marketing dollar deals immediately. Capital inflows and economic growth will support the domestic bid for the pipeline of well-known names in the prolonged future, and it will be able to make up a sizeable bulk of offer bids. But the country needs PHP680 billion (US$16 billion) in infrastructure funding by 2016 when foreign direct investment has barely crossed the US$2 billion mark. In addition, companies will also need to increasingly tap the global markets as they expand overseas and Basel III requirements put a strain in loans.
As companies step up their foray into international bond arena and eventually look to larger markets by structuring 144a deals, it will be helpful to remind issuers to envision a future that is less dependent on its domestic base. For now, onshore liquidity is very much strong enough to fall back on, but there will come a day when the extra paperwork will pay off.