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SMC eyes P20-B bond offer

Conglomerate retains highest rating on debt notes
/ 12:18 AM February 24, 2014

Local beer giant San Miguel Brewery Inc. plans to tap the local bond market to raise as much as P20 billion to refinance older bonds maturing later this year.

SMB’s proposed offering of seven and 10-year bonds has been given a triple-A credit rating by Philippine Rating Services Corp., the credit watchdog said in a press statement.

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The base offering size is proposed at P15 billion, with an oversubscription option of up to P5 billion.

Philratings said it had also maintained the PRS Aaa rating on SMB’s outstanding bonds worth P45.21 billion. Based on the local creditwatcher’s benchmarks, PRS Aaa-rated debt securities are deemed “of the highest quality with minimal credit risk” and the borrower’s capacity to meet its financial commitment is considered “extremely strong.”

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Proceeds from this new issuance will be used to refinance maturing obligations, including the outstanding series B bonds worth P22.4 billion maturing this April 4. This maturing portion is the second tranche of the P38.8-billion landmark local bond issuance by SMB in 2009.

In its press statement, Philratings said that it had assigned the highest rating in its scale on this proposed bond issuance.

This was due to SMB’s dominant market position domestically given well-received products, both old and new, with a long history of sustaining significant competitive advantages over current competitors and enhanced further by the industry’s high barriers to entry for prospective players.

SMB also had an experienced management and production team, with technical support from Kirin Holdings of Japan.

The ratings firm noted SMB’s sustained track record of producing significant amounts of cash from operations relative to debt servicing and other capital expenditure requirements.

SMB, it said, also had strong financial flexibility and adequate capitalization which are seen to further improve in the medium-term.

It said that refinancing maturing bonds using proceeds from this new offering will effectively enhance the company’s current financial position through the lengthening of its debt maturities and the lowering of SMB’s average borrowing rate.

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SMB—the long-time leader in the Philippine beer industry, with a reported estimated market share of more than 96 percent as of end 2013—has five breweries producing established brands such as San Miguel Pale Pilsen, Red Horse Beer and San Mig Light.

“Its newer products, such as San Mig Zero and San Miguel Flavored Beer have also been well received by consumers, demonstrating the company’s ability to anticipate and respond well to trends in the market,” Philratings said, noting that these brands are sold through an “extensive and efficient distribution system.”

The Sin Tax Reform Act restructured the excise tax on alcohol effective January 1, 2013, which raised beer taxes significantly and curbed demand in the short-term.

“Despite the increase in taxes and consequently, beer prices, the company was able to maintain its strong cash position, with cash from operations at P13.67 billion in 2013,” Philratings said, noting that cash flow interest coverage and debt service coverage rations were adequate.

Prior to the passing of this law, the tax law for alcoholic beverages followed a three-tier system wherein more expensive products are taxed higher while less expensive products are taxed lower. The Sin Tax Reform Act will transition the excise tax system from the three-tier model to a unitary tax model— where a single rate would applied—by 2017.

“Going forward, the beer industry is expected to continue to grow and recover from the effects of the implementation of the new excise tax law in 2013. In the medium term, the company will continue implementing campaigns for volume generation and will develop other channels of distribution and for marketing,” it said.

PhilRatings believes that the dominance of SMB will continue.

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