More financing options for PH companies
Philippine companies are increasingly tapping the retail bond market, establishing a reliable source of funding while giving investors an opportunity to make their money work.
The trend highlights both the appeal of locking in long-term financing in a low-interest-rate environment and the rising investing power of the country’s growing middle class.
“It’s a trend that emerged in the early part of the year and we see that continuing in the entirety of 2012,” says First Metro Investments Corp. president Roberto Juanchito Dispo.
“Corporate issuers are basically developing a new avenue for their fund-raising other than bank loans and corporate note issuances to banks and financial institutions. They’re creating a new way of mobilizing resources by going directly to retail investors,” he adds.
Dispo also says a telephone company, a property developer and a holding firm are among those expected to sell small-denominated bonds this year.
Small-denominated bonds, or retail bonds, were brought into the market by the Bureau of the Treasury in the early 2000s as part of a broader plan to develop the local capital market. With every issuance heavily subscribed year after year, state-owned firms and big private companies were enticed to venture into this market to meet their funding needs.
The government’s retail treasury bonds typically have denominations of as low as P5,000 while corporate retail bonds have denominations of P50,000 to P100,000.
This year, the retail bond market is expected be more active as some conglomerates have started reaching their credit limit. The Singe Borrower Limit (SBL) rule imposes a ceiling on the amount of loans that a bank or financial institution may extend to a single borrower and its related entities to prevent over-concentration of credit risk.
The preference of companies to issue bonds is being matched by the interest of Filipinos to invest in this type of security.
Regional investment group CLSA Asia Pacific noted in a report that most of the country’s middle class, which is growing at 9 percent a year and, by 2015, could represent a fifth of the Philippines ’ population, have their savings in fixed income.
Not every company can sell retail bonds, though. So far, only the bigger and well-known companies such as Ayala Corp. and San Miguel Corp. have raised money via the small-denominated bonds. That’s because they must first be able to establish a good track record with institutional investors before they can attract retail investors.
Certainly, repeat issuers and fundamentally sound companies won’t have trouble raising money in the capital markets this year, bankers say.
This spells continued mergers and acquisitions, leading to more job opportunities. Or this could simply mean that companies will manage to pay debt and finance operations, helping fuel economic growth.
“Interest rates are very low,” noted Bangko Sentral ng Pilipinas Deputy Governor Diwa Guinigundo, suggesting that companies can easily afford loans. “They can also borrow from other sources: bond market, equities market, and intercompany account. They have many options for raising funding.”
“The banks are gung-ho to lend so there’s no problem with financing. The big companies could probably access the capital markets. Financing is the least problem of the country right now,” said East West Bank president Antonio Moncupa Jr.
Across Asia, companies are tapping bond markets at a record pace amid worries that securing funds later in the year may become more difficult and expensive if the eurozone crisis deepens.
In the Philippines, refinancing will also continue to be a prevalent theme. Companies are expected to prepay debts to make use of the opportunity to lower interest payments and lengthen tenors, analysts say.
The costs of raising money through the bond market are traditionally higher compared to loans but the low-interest-rate environment allows borrowers to lock in long-term funding.
For bigger and better-known companies, which have access to overseas funding too, the decision whether to tap onshore or offshore markets is essentially a choice of currency denomination and investor base, experts say. This is determined by the cost structure of each market and the borrower’s ability to hedge and manage currency risk.
The value of all peso-denominated bonds sold by domestic companies in the Philippines has hit $630.7 million from five issues as of March 14, according to data from Thomson Reuters. In the same period in 2011, three companies tapped that market to raise $732.9 million. In the whole of 2011, the value of all peso-denominated corporate bonds reached $3.2 billion, the data showed.
Overall, 2012 will likely be a strong year for Philippine corporate funding both through debt and equity given the high business confidence and the positive economic prospects, says BPI Asset Management and Trust Group head Maria Theresa Marcial-Javier.
The rise in corporate bond issuances is expected to continue this year. In equities, she said a possible re-rating and strong investor support should encourage initial public offerings and private placements.
“At this time when business optimism is running high, the choice of whether to tap equities or debt depends on the company’s own financing requirements in the light of their own objectives or constraints in the capital budgeting exercise,” she points out.
