Capital market developments

The biggest ever shares offering made in the country—P80.25 billion—was launched by San Miguel Corp. early this week and would end on September 14.

Some 1.067 billion non-voting preferred shares valued at P75 per share will be issued by SMC to interested buyers. The proceeds will be used to redeem the preferred shares earlier issued in exchange for common shares and for general corporate purposes.

In June, Ayala Land Inc. issued voting preferred shares by way of rights offering, i.e., limited to existing stockholders, to expand its Filipino ownership base and raise additional capital for its expansion program.

In the same month, SM Investment Corp. made a P10-billion public bond offer to meet the financing requirements of its burgeoning office and hotel business.

In April, GT Capital Holdings Inc., the flagship company of business tycoon George Ty, raised P24.4 billion from the first initial public offering conducted this year.

With the continued improvement of the business climate in the country, despite intermittent natural calamities, more companies are expected to offer shares of stocks or corporate bonds to raise additional capital for existing and future projects.

Obligations

These fund-raising activities show that public companies are weaning themselves away from traditional means of raising capital—shareholder equity and borrowing from financial institutions.

It is understandable for start-up businesses and small enterprises to rely on the personal resources of their stockholders or seek loans from banks to raise the capital needed to sustain their operations.

However, not all stockholders have deep pockets or are willing to risk all their money in business ventures, more so if the financial stability of their families is put on the line.

Neither can all banks be expected to be extra-generous to their clients on the terms of their loans. Bank executives have stockholders to answer to who expect their investments to reap respectable returns through the judicious management of bank resources.

It is noteworthy to mention that heavy reliance on banks and credit institutions for expansion by big businesses has been determined by some experts as a principal contributory factor to the 1997 Asian financial crisis.

A financial hiccup in Thailand brought about by speculative construction loans shook the confidence of foreign and local banks in the region on the ability of their clients to meet their obligations.

Scared (or almost in panic) about possible loan defaults, the banks either called in their loans ahead of the due dates or demanded additional mortgage to protect their interests. Highly leveraged businesses were forced to cease operations or sell out.

Properties

The advantage of raising capital through stock offerings or bonds and other forms of corporate indebtedness is the companies are not held hostage to the terms and conditions that banks impose on borrowers.

Aside from paying different kinds of fees, debtor companies are obliged to, among others, submit periodic reports about the project covered by the loan, disclose material changes in their operation and maintain the financial ratios on which the banks based their decision to lend money.

If the loan, for example, is secured by a mortgage on the company’s stocks or properties, the company has to make sure the value of those stocks or properties does not go below their pre-agreed valuation, otherwise it will have to put up additional stocks or properties to make up for the drop in the value.

Worse, a slip-up in loan compliance could have adverse consequences on the credit standing of the errant company.

In stock offerings or corporate bond issuances, the initial costs involve underwriting expenses, regulatory fees and professional fees for the lawyers and accountants who will prepare the necessary legal and financial documents.

Once the stocks or bonds are sold and the money is received, the company’s tasks will all just be housekeeping, i.e., informing the stockholders of corporate activities, sending dividends to preferred shareholders, or remitting interest payments to the banks for delivery to the bondholders.

Shared risks

A person who buys stocks—common or preferred—becomes part owner of the firm. As a stockholder, he shares in the risks of the business. If it earns profits, he can look forward to receiving dividends; if it does not, he has to suffer with the rest of the stockholders the loss of the value of their investments.

He is not considered a creditor whom the company must reimburse the money he paid for the stocks in case the firm flounders.

A similar kind of risk is also assumed by buyers of corporate bonds. Bonds are offered and sold on the assumption that the issuing company will be able to make good on its promise to pay interests as they fall due and return the principal when the bond matures.

By the nature of their relationship, a bondholder is a creditor of the issuing company. Thus, in case the company goes bankrupt, the bondholder will be treated like any other creditor in the distribution of the firm’s assets.

Whether stocks or bonds, it is essential that the buyer examine the financial statements and track record of the company to determine its capability to meet its obligations.

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