IFR Asia: Southeast Asia debt capital markets guide – the Philippines

IFR Asia: Southeast Asia debt capital markets guide – Singapore
21 December, 2009
IFR Asia: Southeast Asia debt capital markets guide – region
21 December, 2009
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IFR Asia Southeast Asia debt capital markets report: Philippines

December 2009

If you had to pick one local currency bond market in the region that really stepped during the global financial crisis, it would probably be the Philippines. It’s not that the volumes raised in it are particularly great: less than a quarter as much was raised here as in Malaysia, and less too than Singapore or Thailand. But it’s the magnitude of improvement on previous years, delivered in a hopeless international environment, that stands out.

“One of the markets in the region that has developed most in my opinion is the Philippines,” says Sean Henderson at HSBC. “Historically it’s been a quite predictable, smallish-size kind of market.” But a look at issuance volumes demonstrates how it has stepped up. In 2008, according to ThomsonReuters, P86 billion was raised in peso debt; by November 19, the 2009 figure already stood more than 50% higher at P133.58 billion with several weeks of the year still to go.

Jose Pacifico Marcelo, head of investment banking at First Metro Investment Corporation, says the peso debt market has been more active this year than in any of his previous 10 at the bank. “It’s surprising, as only a year ago investment banking worldwide was thought to be in its death throes,” he says. “The local economy and financial sector has proven to be in better shape than counterparts in developed countries. As a result, the peso debt market became the haven of local borrowers and issuers who, fearful of the negative impact of the global financial crisis, advanced their funding requirements.” His own data puts total volume for the first 10 months of 2009 at P472 billion including government debt – a figure that has trebled year-on-year.

This bounty of new funding was vitally important for companies and banks in the Philippines. “Corporates’ ability to fund themselves without having to go offshore was vital in the depths of the crisis,” says Henderson. “If any one of them had had to come to the offshore high yield markets, they would have had to pay up massively.”

“So it’s done a few things,” says Henderson. “It’s kept a lot of borrowers out of G3 markets through the worst of the volatility; question marks over foreign borrowings haven’t been there; and it’s kept cost of funds lower than they might otherwise have been.”

Arguably the most significant local currency deal anywhere in southeast Asia in 2009 took place here: the P38.8 deal for San Miguel Brewery (see box). But that wasn’t all that happened. “San Miguel was an enormous benchmark for what people could get done,” says Henderson. “But on top of that you saw Robinson Land with two P5 billion issues, JG Summit – as corporate deals these were significantly larger than anything we saw in 2007-2008.”

In fact, a look at the bigger peso deals of 2009 shows a diverse roster of issuers. In the midst of the crisis, in February, Globe Telecom raised P5 billion in a deal led by BPI Capital, BDO Capital and First Metro. Then came the San Miguel Brewery landmark in March, followed by Petron, which raised P10 billion in May; Land Bank of the Philippines, which raised just under P7 in June, and then SM Investments (P10 billion) and Robinsons Land (P5 billion) the same month. Robinsons was back with another deal of the same size in August, by which time Energy Development Corp had raised P7.2 billion; since then Aboitiz Power Corp and Megaworld have raised P5 billion apiece. In short, funds have been raised for banks – including lower tier two capital – real estate, consumer goods and energy.

They’re also, mainly, household names. The brand recognition point reflects a powerful retail bid, expressed through the private banks. In fact, the investor base is quite diversified in the Philippines: banks, trust companies, insurance companies and mutual funds are all powerful. It adds up to a very liquid market for the right names. “When you look at San Miguel in Philippine pesos, that’s a deal size in local markets that’s been unheard of before now for corporate issuers,” says Jan Wipplinger at Deutsche Bank. “It shows the depth of the bid of the local investor base for local names.”

Notably, there is a strong onshore dollar bid in the Philippines too. “You saw with the SM Investment dollar deal, the largest ever corporate dollar deal, that there’s an enormous dollar bid onshore as well as a developing peso market,” says Rod Sykes at HSBC. “If you look at any Philippine dollar deal, in almost all cases there is significant onshore participation.” Wipplinger agrees. “When the Philippines launches in US dollars there is always a strong domestic bid. For SMIC and the banks there is a very tight domestic bid through international dollar curves.”

Peng-Meng Ling at Standard Chartered highlights the appetite for lower-tier bank capital in the Philippines, noting that investors show more interest in subordinated debt or preference shares than in other markets. Lower tier two sub-debt issuers have included Metrobank and RCBC since the collapse of Lehman – among the first places anywhere to reopen sub-debt issuance, he points out.

Still, things are not perfect, and in particular secondary market liquidity is weak. “Overall liquidity in the primary market is high,” says Marcelo. “For the secondary market, the only liquid issues are those by the government. For private issues, investors are primarily buy-and-hold.” He says tenor is lengthening, with retail bond issues showing some demand as long as seven years, and project financing up to 12 years. “Sophistication is still limited, as investors stick to simple products and top-tier issuers,” he says. “New products like securitization and REITs are expected to be more active in the next two years.”

Marcelo says the pipeline looks less impressive than 2009 has turned out. “With the May 2010 presidential elections, issuers will try to complete transactions by the first quarter,” he says. “The second quarter will likely be slow, and then volume will pick up by the second half.” In aggregate, he expects much lower overall peso debt volumes than in 2009, but hope springs eternal: “If the election results are credible, 2011 may be as good as this year.”

BOX: Deal profile: San Miguel Brewery.

If the Philippine debt markets proved their worth in 2009, San Miguel Brewery’s P38.8 billion (US$800 million) raising in March was the deal that did most to create that impression. “San Miguel was the standout in redefining in people’s minds what was achievable,” says Sean Henderson at HSBC, which was a bookrunner on the deal alongside Development Bank of the Philippines.

This was a fourfold increase on the previous record biggest Philippine peso bond issue, achieved in the middle of a global financial crisis, for a first-time issuer. Originally, the issuer had looked at going to offshore markets, or an onshore/offshore combination, before the global markets locked up. Rather than downsize, the deal proved there was no need to go overseas.

The deal did underline the point that brand name is vital in Philippine debt as well as equity. The prompt for the issue was San Miguel Corp’s spin-off of its brewery business, the largest brewery in the Philippines – a 95% market share – and a world-recognised beer brand.

The deal came in three tranches, a three-year at 8.25%, five years at 8.875% and 10 years at 10.5%. All priced at the tight end of guidance. Appetite came from institutional banks, pension funds, insurers and retail, with a wide range of domestic underwriters brought in order to increase to the greatest possible degree the reach of the deal. BDO Capital, BPI Capital, China Bank, First Metro Investment Corp, ING, Land Bank of the Philippines, Philippine Commercial Capital, Rizal Commercial Banking Corp, and Standard Chartered Bank, all ended up with joint underwriting credit alongside the bookrunners.

Other corporate bonds are covered in the main texts, but government issuance has been notable too. Marcelo considers the most significant deal for 2009 to be tranche 11 of the Retail Treasury Bonds, which raised P114.4 billion in September: the biggest retail bond issue for the Philippines since the government first started offering the bonds in 2001. Marcelo also highlights a project finance deal, Cebu Energy Development Corp – the first of its kind to raise all its debt requirements from the peso debt market, raising P16 billion.

Chris Wright
Chris Wright
Chris is a journalist specialising in business and financial journalism across Asia, Australia and the Middle East. He is Asia editor for Euromoney magazine and has written for publications including the Financial Times, Institutional Investor, Forbes, Asiamoney, the Australian Financial Review, Discovery Channel Magazine, Qantas: The Australian Way and BRW. He is the author of No More Worlds to Conquer, published by HarperCollins.

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