Retail bond offerings

The corporate bond market in the country is on a roll.

Last month, telecommunications giant PLDT raised P15 billion from peso retail bonds which it plans to use to fund its expansion projects and refinance existing obligations.

Soon after, the kapamilya network, ABS-CBN, debuted in the domestic bond market with its P6 billion bonds whose proceeds will be applied to, among others, the expansion of its pay-TV business and migration to digital terrestrial television.

JG Summit Holdings Inc., the flagship of the Gokongwei conglomerate, has been given the go signal by the Securities and Exchange Commission to float P30 billion worth of bonds next week.

According to the offering prospectus, the money will be used for general corporate purposes and to help fund its purchase of San Miguel Corp.’s shares in Meralco.

Early this week, Manila North Tollways Corp. applied with the SEC for authority to sell P7 billion worth of bonds to partially finance the construction of the road that will link the North Luzon and South Luzon Expressways.

If granted, MNTC will be the first company not listed on the stock exchange that will sell its bonds to the public.

Investments

As more big ticket projects are being rolled out by the government, the number of retail bond offerings by private companies is expected to increase this year.

The retail bond offerings are indicative of the growing maturity of the country’s capital market as the traditional avenues for investment lose their luster.

Before, most companies raised funds for their projects through additional subscriptions by their stockholders or by borrowing from banks and other financial institutions.

But capital calls are only as good as their stockholders’ individual financial capacity and willingness to take on more risks.

Although helpful, the banks have to contend with the Dosri (directors, officers, stockholders and other related interests) rule which limits the amount of money they can lend to companies.

What’s more, the interests, fees and charges imposed on loans, not to mention the paperwork that has to be done while the loan is outstanding, make the borrowing route unattractive.

For a time, going public, i.e., doing an IPO (or initial public offering) or listing on the stock market, was considered the fastest way to raise capital.

Although “glamorous” on paper, this scheme is saddled with numerous reporting and disclosure regulations which practically require the creation of a staff devoted to ensuring compliance with those rules.

Once listed, the financial market’s perception of the health or viability of the company is heavily influenced by its stock price or its trading pattern in the bourse.

Offerings

Cost-wise, it is more advantageous for companies to raise funds through bond offerings than list their stocks on the stock market.

The amount of time, money and effort needed to float bonds is almost the same (and sometimes lesser if the internal financial and legal staff are capable) as that required for stock listing.

Whether bond offering or IPO, its proceeds, minus the fees and charges of the parties that participated in the transaction, are remitted to the company by the underwriter after the deal is formally closed.

Through retail bonds, the issuer companies can have a pulse on how it is looked at by the investing public.

Unlike corporate bonds, retail bonds are, as the name denotes, offered in increments of P50,000, or lower depending on the bond size, to attract investors other than pension funds, trust accounts and other big time investors.

The “small investors” are the low key people who have substantial savings tucked away in the banks, e.g., retirees, or have disposable income looking for safe investment accounts.

The low interest paid by savings and commercial banks on their deposits is the biggest disincentive for keeping them there.

For this investment sector, the public reputation of the bond issuer is decisive.

Assurance

If the investors believe the offered interest rates are attractive and the company can make good its promise to pay them promptly during the indicated periods and their principal repaid upon maturity, they will make a beeline for its bonds.

Retail bonds, or for that matter, any form of corporate bond, are not for people who want high returns on their investments or enjoy selling or buying securities depending on the play of market forces.

In retail bonds, the interest rate, payment period and redemption of principal are fixed or pre-determined. Since bondholders are considered creditors of the company, they have priority in the payment of the interest and principal.

No dividends can be paid to the stockholders unless the company pays first its obligations to the bondholders or sets aside sufficient funds to answer for payments in the future.

That preferential right, however, carries a corresponding obligation on the bondholder’s part to maintain his investment during the life of the bond. He cannot, as a rule, demand its return ahead of maturity without incurring some financial liability for the early termination.

All told, retail bonds are a perfect fit for conservative investors, i.e., those who want steady returns on their investment and recovery of their principal later.

With so much liquidity in the market and financial literacy among Filipinos on the rise, there is room for bonds and other financial instruments that can tap the millions of pesos sleeping in low interest bearing bank deposits.

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