Tax Boss Who Took On Pacquiao Chills Bond Market: Asean Credit

Sep 04, 2014 10:09 pm ET

(For more credit columns, see TOP CM.)

Sept. 5 (Bloomberg) -- Philippine inland revenue boss Kim Henares is taking her four-year fight against tax evasion to the capital markets, slowing record corporate bond sales.

After freezing the bank accounts of Manny Pacquiao, the world-champion boxer, Henares issued a ruling in January requiring companies to list the names of all investors receiving dividends or coupon payments. The directive, which came to the fore this quarter as it was implemented more strictly, is causing some investors to avoid buying company debt, Gus Cosio, president of First Metro Asset Management Inc. in Manila, said in a Sept. 2 interview.

“Some large investors have moved funds out of the country and stopped investing in fixed income and equity capital market offers,” Eduardo Francisco, president of BDO Capital & Investment Corp., the nation’s largest syndicated loan arranger, said in an Sept. 2 interview in Manila. The ruling damped demand for offers in the last two weeks by SM Prime Holdings Inc., the mall operator controlled by billionaire Henry Sy, and Century Properties Group Inc., he said.

The measure discourages investment and risks capital flight, eight Philippine business groups and the stock exchange wrote in a joint letter sent to the finance ministry on July 21. Henares, who is at the forefront of President Benigno Aquino’s campaign to shrink the budget deficit and stamp out corruption, said the industry’s reaction shows investors may have been dodging taxes. Local companies have sold $4.4 billion of debt this year, trailing the $17.7 billion in Malaysia and $12.5 billion in Thailand.

Interest Rates

SM Prime, the country’s biggest mall operator, sold 20 billion pesos ($459 million) of notes, short of its 25 billion peso maximum target. Century Properties raised 2.7 billion pesos, compared with a 3 billion peso goal. SM Prime would have received an extra 5 billion pesos of bids without the ruling and Century would have attracted 500 million pesos more, said Francisco of BDO Capital, which is owned by Henry Sy.

Philippine corporate debt issuance has already surpassed the previous record of $4 billion in 2012 as companies rushed to raise money before the central bank increased borrowing costs. JG Summit Holdings Inc., a conglomerate with interests in food, transport, real estate and banking, raised 30 billion pesos in this year’s biggest corporate sale and Metropolitan Bank & Trust Co., the third-largest lender by market value, sold 16 billion pesos of 10-year notes in March.

Bangko Sentral ng Pilipinas lifted its policy rate to 3.75 percent from 3.5 percent in July, the first increase since 2011. Fourteen of 18 analysts surveyed by Bloomberg see the rate at 4 percent or higher by the end of the year.

Alphabetical List

The peso has strengthened 1.7 percent to 43.625 per dollar this year, the worst performance among the four major Southeast Asian emerging-market currencies, data compiled by Bloomberg show. The yield on the Philippines 10-year benchmark sovereign notes rose 57 basis points, or 0.57 percentage point, in 2014 to 4.38 percent, while yields on similar-maturity bonds from Indonesia, Thailand and Malaysia have fallen.

The regulation seeks to strengthen a 2012 ruling that requires issuers of stocks and bonds to deduct and send directly to the government the taxes imposed on the dividends and coupons paid to investors. January’s ruling makes it mandatory for companies to submit an alphabetical list of all recipients of those payments.

“Investors are avoiding any issues where they would expose themselves to an alphalist report,” First Metro’s Cosio said.

Appointed by Aquino in 2010, Henares’s tenacity in plugging tax leaks has helped the Philippines claw back some of the $10 billion, or 4 percent of gross domestic product, that the government estimates is unpaid every year. Her crusade hasn’t always been easy. The Supreme Court last month stopped the tax agency from seizing the assets of Pacquiao, the title fighter who is also a lawmaker and national icon.

Tax Evasion

The ruling should have been implemented long before and the industry’s reaction has only strengthened her resolve to go after tax cheats, Henares said in a Sept. 3 phone interview.

“Why would you complain if in the first place, you have reported it when you should be reporting it and when you should be paying taxes on it,” she said from Manila. “So you’re complaining now makes me think that you haven’t been paying the right tax,” she said, referring to investors.

Among companies that have announced plans to sell bonds this year but haven’t done so yet are BPI Family Savings Bank, which said last month it would offer 5 billion pesos of asset- backed securities, and 8990 Holdings Inc., a property company, which said in May it may offer 1 billion pesos of debt.

Small Market

The ruling may make it more difficult for the Philippines to expand its local-currency corporate bond market to narrow the gap with 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.

“People are not used to this new reporting requirement,” Dennis Montecillo, president of BPI Capital Corp. in Manila, said in Sept. 2 phone interview. “Like anything new, I’m sure there’s some short-term impact on the market.”

--With assistance from Clarissa Batino in Manila.