Investors snap up SMC preferred shares

Conglomerate San Miguel Corp. is entering the final stretch of its retail offering of preferred shares worth as much as P80 billion this week, with growing interest for the issue, according to bankers familiar with the deal.

“The momentum has been strong since the start and we expect it stronger toward the last week as orders pile in,” said one of the bookrunners of the single largest capital-raising activity in the country to date.

“The retail take-up is very good and it’s coming from all over the country,” the bookrunner added.

SMC is offering as much as 1.067 billion in new SMC preferred shares at an issue price of P75 per share. The base offer comprises 960 million shares with an option to upsize by 107 million shares.

The offering will run until September 14, Friday, this week while the listing on the Philippine Stock Exchange is targeted by September 28.

The bookrunners for the offering were HSBC, Union Bank, BDO Capital, China Bank, RCBC Capital, First Metro Investments Corp., ING Bank, Philippine Commercial Capital Inc., Standard Chartered Bank, SB Capital and United Coconut Planters Bank.

The preferred shares are redeemable starting on the third year, fifth year and seventh year and every dividend payment thereafter or SMC will otherwise pay a higher interest rates. Such “step-up” rates will be effective in the fifth, seventh and 10th year, respectively, if the shares are not redeemed by then.

Dividend rate per annum on the sub-series that carries a step-up rate in five years is 7.5 percent and that on sub-series with step-up rate in seventh year is 7.625 percent. The sub-series that will have a step-up rate in 10 years will be paid a dividend rate of 8 percent per annum. There will be a 10 percent tax on retail investors.

As to what is driving demand for the preferred shares, the bookrunner said: “There are no alternative investments available, and since the very steep step-up is a synthetic maturity and strong dividend history, then it becomes a compelling investment to those that rely on fixed income investments.”

In a separate interview, a stock analyst said SMC’s credit-worthiness remained comfortable. “I estimate that SMC generates around P14 billion in net operating profit, less adjusted tax and existing debt service. This means that they are able to earn profits that can service debt and taxes equal to P14 billion, which is more than sufficient to cover the preferred share dividend payout.”

Meanwhile, another stock broker said a key risk to this investment was if local interest rates shoot up in the future, which means that SMC may opt not to redeem these perpetual bonds. Another risk is if there would be snags on the listing of the preferred shares on the PSE, which will otherwise change assumptions on taxation and exit options. Both risks are deemed minimal.

The preferred shares will be issued upon approval by the SEC of the increase in SMC’s authorized capital stock from P22.5 billion to P30 billion.

As earlier reported, bulk of the proceeds will be used to redeem all of SMC’s existing P72.8 billion series 1 preferred shares while the remainder shall be for general corporate purposes, including partial repayment of short-term debt.

In its prospectus, the preferred shares are being sold on the back of the SMC’s strengths on the following:

— Broad exposure to the growing Philippine economy;

— Market leading positions in key local industries such as beverages, food, packaging, fuel and oil, energy and infrastructure;

— Experienced management team;

— Operating businesses that provide “sustainable” stream of income and cash flows; and

— Well-positioned platform for significant future growth.