SMB seeks consent to bond terms amendment

MANILA, Philippines–San Miguel Brewery Inc. has begun seeking approval from bondholders to amend the terms of its P38.8-billion bonds, citing the need to strengthen investor protection, align with global credit rating debt metrics and make room for more efficient use of resources.

The beer unit of diversifying conglomerate San Miguel Corp. launched the solicitation of consent on Monday with a promise to pay P1.25 per P1,000 of the principal amount held by consenting investors. As a sweetener, it offered to pay  the “early bird” – each consenting bondholder who submits paperwork on or before Jan. 12, 2012 – P1 per P1,000 of principal amount of bonds held.

The deadline for the exercise is on Jan. 27 next year although SMB can opt to adjust the expiration date and the early bird deadline. The advisor on the transaction is ING Bank.

To amend the bond covenant, SMB needs to generate approval from majority of the holders of its outstanding 8.25 percent series A bonds due 2012, 8.875 percent series B bonds due 2014 and 10.5 percent series C bonds due 2019.

The bond covenant requires SMB to maintain a minimum current ratio (current assets divided by current liabilities) of 1:1 and a maximum debt-to-equity (total indebtedness divided by capital) ratio of 3.5:1.

SMB intends to keep the debt-to-equity requirement but proposes to replace the minimum current ratio with a minimum interest coverage ratio of 4.75:1. Interest coverage ratio is defined as EBITDA (earnings before interest, taxes, depreciation and amortization) divided by interest expense for the period.

“Bond investors generally expect that an issuer can meet its maturing obligations through internally generated funds and/or by refinancing or accessing the capital markets. As such, bond investors particularly put great importance on an issuer’s debt level and on the stability and predictability of earnings and thus cash flow to

meet debt service obligations. In the case of the issuer, a leverage and coverage ratio is ideal as it will give investors the trend in its financial performance and an indication of its ability to meet financial obligations,” SMB said in its solicitation letter.

SMB explained that the proposed replacement of the current ratio with the interest coverage ratio would be more reflective of its ability to service its obligations from its operations by showing the extent to which interest is covered by earnings.

It added that this amendment would strengthen investor protection as the leverage and interest coverage ratios effectively limit additional debt unless it is able to generate enough earnings to service such debt.

The amendment is also seen giving SMB more leeway to use resources efficiently.

In the past two years, SMB has kept an average of P24 billion in current assets, and in particular, an average of P15 billion in cash to support working capital requirements. As the other bond tranches fell current next year and were reclassified to form part of the current liabilities, SMB have to maintain sizable cash balances and current assets to comply with the minimum current ratio.

“While the issuer expects that it will be able to meet the minimum current ratio through internally-generated funds, pre-funding the maturing obligation and maintaining such significant amount of liquidity will not be an efficient use of the Issuer’s resources,” SMB said.

As it controls more than 95 percent of the market and a relatively stable earning capacity, SMB said it was generating predictable cash flows to amply service its maturing obligations.

“The shift to interest coverage ratio is actually something that is more conservative and in-line with most global bond covenants. So it’s not an easier ratio per se relative to the current ratio,” an equities analyst said.

While there’s no immediate problem with the business, the analyst said the current ratio was strained by the inclusion of the three-year portion of the 2009 bonds that would mature next year as part of current liabilities.  The proposed shift is thus only a precautionary measure, the analyst said.