PH borrowers turn to peso bonds
SINGAPORE (IFR) – Philippine companies are expected to issue more local currency bonds to retail investors to reduce their dollar debt and trim currency risk, led by one of the country’s largest conglomerates.
San Miguel Corporation, which has interests in beverages, food, energy, and infrastructure, is eyeing more peso bonds to reduce its dependence on dollar borrowings. “We plan to replace dollar-denominated debt with fixed-rate peso bonds to the extent that we can,” a San Miguel spokesperson said by email. The conglomerate is targeting proceeds of 15 billion pesos ($300 million) from the sale of fixed-rate peso bonds with tenors of five, seven and 10 years, with an oversubscription option of 5 billion pesos. The proceeds will be used to partially refinance loans San Miguel took from various local banks to prepay a portion of its US dollar debt, according to PhilRatings. The rating agency has assigned a Aaa rating to the bonds.
The Securities and Exchange Commission has granted San Miguel a shelf registration to issue 60 billion pesos of fixed-rate bonds, meaning that it could come back for further issues.
The dollar-denominated debt on San Miguel’s book is 35 percent of its consolidated debt, a decline of around 10 percent in the first nine months of fiscal year 2017. This is a result of the company’s efforts to reduce exposure to dollar debt and reduce the effects of currency volatility.
The Philippine peso depreciated five percent against the dollar to 49.5 in 2016. Nomura expects it to fall to 50.2 by the end of March.
Other Philippine companies that do not have a natural dollar hedge from earnings are also turning to onshore debt.
“Greater access to onshore funding at a lower cost is causing companies to look more closely at raising peso debt to replace their dollar borrowings, unless their assets and revenues are in dollars,” said Teresa Kong, portfolio manager at Matthews Asia.
Philippine companies seem to be timing the market as most economists expect Bangko Sentral ng Pilipinas (BSP) to raise interest rates this year. Most of the companies are issuing fixed-rate peso bonds because “the CFOs are just being cautious and defensive ahead of the Fed move”, said Paolo Magpale, a treasurer at BDO Private Bank. The US Federal Reserve is expected to raise rates two to three times this year. Besides global uncertainties, there is upward pressure on local yields, since BSP is likely to be the only Asian central bank to raise rates this year, according to Nomura. “We are expecting a 50 basis points rate hike this year on the premise that headline inflation will rise sharply,” said Lavanya Venkateswaran, vice president and economist for South-East Asia at Nomura. Headline inflation edged up to 2.7 percent year on year in January, and is expected to rise on account of electricity tariff adjustments, higher global oil prices and strong core inflation led by robust domestic growth. Nomura expects it to average 3.3 percent this year and said Philippine GDP could grow by even more than its forecast of 6.3 percent for 2017. Higher government spending, growing remittances from overseas foreign workers and growth in the business process outsourcing sector are all ensuring ample liquidity in the Philippine bond market, said a San Miguel spokesperson. Overseas remittances hit $29.7 billion in 2016, up five percent from a year ago, according to BSP data. Surplus liquidity is incentivizing retail investors to buy peso bonds. “Retail investors are getting higher returns from investing in fixed-rate bonds compared to the current rate of inflation,” said Magpale from BDO Private Bank. The returns are at least 200 basis points more than the current rate of inflation. While local investors are bullish on onshore bonds, foreign investors have turned cautious, bearing in mind the currency risk and outlook for central bank policy.
“The Philippines interest rate cycle is quite correlated with that of the US,” said Kong at Matthews Asia. “For all these reasons, local bonds might have more downside than upside.”