Billionaire Sy Leads Philippine Company Bond Rush: Asean Credit

May 02, 2014 3:40 am ET

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May 2 (Bloomberg) -- Philippine companies are tapping the bond market at three times last year’s pace as they race to raise money before the central bank increases borrowing costs.

SM Prime Holdings Inc., the nation’s largest mall operator controlled by the country’s richest man Henry Sy, said today it may sell as much as 25 billion pesos ($561 million) of debt this quarter to fund domestic expansion. Companies in Southeast Asia’s fastest-growing economy have raised 105.8 billion pesos this year, compared with 26.5 billion pesos in the same period of 2013, putting them on track to exceed the high of 174.4 billion pesos in 2012.

“We are on course for a record year in corporate bond issuance,” Rey Montalbo, the Manila-based head of treasury at First Metro Investment Corp., the nation’s biggest debt arranger in 2013, said in an April 29 interview. “We’re seeing a surge in sales so companies can lock in their cost of borrowing while interest rates remain relatively low.”

Bangko Sentral ng Pilipinas Governor Amando Tetangco is facing growing pressure to raise the policy rate as the money supply surges and inflation has exceeded the 3.5 percent benchmark rate since December. The central bank started tightening in March by lifting lenders’ reserve requirements, and the median estimate of economists surveyed by Bloomberg is for the key rate to be at 4 percent by the end of the year.

Attractive Spreads

Philippine 10-year government bonds have been the only decliners of that tenor among the four major Southeast Asian emerging markets this year as prices fell on signs borrowing costs will be increased. The benchmark yield has risen 60 basis points to 4.4 percent, compared with drops of four basis points to 4.07 percent in Malaysia, 35 basis points to 3.55 percent in Thailand and 0.47 percentage point to 7.98 percent in Indonesia.

Sy also owns BDO Unibank Inc., the Philippines’ biggest bank by assets, and has a net worth of $11.7 billion, according to data compiled by Bloomberg.

His holding company, SM Investments Corp., priced 10 billion pesos of notes on April 28. The company’s seven- and 10- year securities will pay a yield of 5.2958 percent and 5.6125 percent, respectively, giving investors a yield advantage of 111 and 120 basis points over sovereign bonds. That compares with premiums of 80 and 104 basis points at its last sale in 2012.

“More and more investors are looking at corporate credit now, where spreads are becoming more attractive,” Mike Ferrer, managing director at ATR Kim Eng Asset Management Inc. in Manila, said in an April 29 phone interview.

Money Supply

Money supply rose more than 30 percent in each of the nine months through March, partially driven by restrictions on investing in the central bank’s special deposit accounts. The benchmark interest rate may not be the best tool to curb the surging cash supply, Governor Tetangco said April 26, suggesting it may be held at the May 8 meeting.

Eight of 14 analysts surveyed by Bloomberg predict the monetary authority will leave its policy rate unchanged through June, while 15 of 17 see increases in the second half.

President Benigno Aquino is raising spending to a record this year and seeking more than $11 billion of investment in airports and highways to boost the country’s economic growth to as much as 7.5 percent. Gross domestic product increased 7.2 percent in 2013 and 6.8 percent in 2012. Inflation probably accelerated to 4.1 percent in April from 3.9 percent in March, according to the median estimate in a Bloomberg survey before data due May 6.

‘Flush Liquidity’

The peso has weakened 0.4 percent in 2014, compared with gains of 5.5 percent for Indonesia’s rupiah and 0.3 percent for Malaysia’s ringgit. The cost of insuring Philippine sovereign bonds using five-year credit-default swaps has fallen 15 basis points this year to 100, according to CMA. That compares with a drop of eight basis points to 121 for Thai debt and a 62 basis point decrease to 172 for Indonesian notes.

“Given the flush liquidity, additional investment outlets are very much welcome,” Jan Briace Santos, a debt trader who helps manage the equivalent of $16 billion at BPI Asset Management in Manila, said in an April 29 phone interview. “Given the growth trajectory in the Philippines, companies are trying to expand borrowing in the bond market.”

The Philippines’ local-currency corporate debt market still lags behind its Southeast Asian peers. It grew 12 percent in 2013 to $13 billion, according to data from the Asian Development Bank. That compares with increases of 16 percent to $18 billion in Indonesia, 14 percent to $61 billion in Thailand and 5.9 percent to $130 billion in Malaysia.

Sales Forecast

Corporate issuance in the Philippines could approach 200 billion pesos this year, First Metro’s Montalbo estimated. Ayala Land Inc., the nation’s second-largest property developer by market value, is planning to offer 7 billion pesos of notes this quarter, and its unit, Cebu Holdings Inc., is considering a 5 billion peso sale.

“Corporate bonds are a way to lock in financing while rates are still low and at a relatively long term of seven to 10 years,” Ed Francisco, president of BDO Capital & Investment Corp., the nation’s largest syndicated loan arranger, said in a April 25 phone interview from Manila. “The consensus view is that the central bank will raise interest rates at some point this year.”