The challenges and opportunities of listing bonds in the Philippines
It is definitely much easier for Philippine Stock Exchangelisted companies to list on the bond exchange, because the internal corporate clean-up and housekeeping that companies undergo before listing on the PSE already suffice as prerequisites to listing on the bond exchange. Similarly, the public disclosures made by PSE-listed entities already satisfy the PDex-imposed requirements before a company can list on the bond exchange.
It is still very much possible for non-PSE-listed companies to list on the bond exchange, though. A company needs to submit its adherence with Corporate Governance Requirements, which consist of (1) compliance with the SEC Code of Corporate Governance, Manual on Corporate Governance and Code of Business and Ethics, (2) the establishment of the Board of Directors Composition and its corresponding Board Committees and (3) the appointment of a compliance officer, a chief audit executive and a chief risk officer. Disclosing crucial information, including financial reports, reports on material events and on directors/officers and compliance with auditing standards and with financial covenants, as well as the establishment of an investor relations program are also mandatory tasks before a non-PSE-listed company is given the green light to raise money from the public and list its bonds on PDex. While it may appear that there is a lot of housekeeping to be done, doing so is really a good practice, as it professionalizes the company and prepares it for an investment from a strategic partner and even a potential initial public offering with the PSE later on.
Preparation for the actual issue Aside from the obvious interest expense that it would have to pay in exchange for borrowing money from the public, the issuer also has to incur unavoidable bond issue costs on the first year of the issuance, amounting to a range of around 1.4 percent to 2.1 percent of total proceeds received depending on the amount raised. Such bond issue costs consist of SEC registration filing, legal research and listing fees, PhilRatings rating and annual monitoring fees, Insurance Commission service fees, Bureau of Internal Revenue documentary stamp taxes, PDex application and annual listing maintenance fees, Philippine Depository and Trust Corp. (PDTC) account opening and paying agency fees, investment banking underwriting and selling fees, underwriters’ legal counsel fees and other expenses, such as publication, roadshow and printing costs. While the bonds are still outstanding in the years succeeding the issuance, the company will then have to pay annual recurring costs ranging from approximately 0.02 percent to 0.16 percent of total proceeds received depending on the amount raised. Such recurring costs include PhilRatings monitoring fees, PDex listing maintenance fees and PDTC paying agency fees. It is more worthwhile to list bonds in larger issue sizes, since the proportion of the costs to the overall issue size decreases as the amount raised increases. As such, the use of proceeds will be maximized in larger issue sizes.
While the costs are already considered quite low relative to the sizable amount of total proceeds raised, we nevertheless hope to work with the other stakeholders, such as the SEC, ratings agencies, underwriters and receiving and transfer agents to minimize the overall costs even further.
An optimal capital market roadmap
Admittedly, direct loans from the banks can be cheaper and faster to execute, but tapping the bond market would diversify a company’s funding and investor base, spread out risks and allow individuals and institutions to invest in the company directly. Tenors can also be longer, and there is no amortization for bonds. Part of one’s optimal capital market roadmap must include having listed bonds and equities aside from substantial bank lines.
Since the bond market is already currently composed of mostly large companies, the entry of smaller PSE-listed and up-and-coming non-PSE-listed companies to the bond market would provide variety and novelty to a wider pool of lenders and bond investors. We encourage the other banks and the larger non-PSE-listed corporates to tap the bond market. We see great potential in these institutions to engage in a mutually beneficial transaction with the investing public.
Ed Francisco is president of BDO Capital & Investment Corp. and vice chairperson of the Shareholders’ Association of the Philippines (SharePHIL). Andrew Poblete is an Associate in BDO Capital.
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