tap dancing with the bond market

More firms tap bond market
by Maria Eloisa I. Calderon/BWorld/11.20.08

PHILIPPINE companies are increasingly relying on the domestic bond market to raise capital as borrowing costs have increased elsewhere and global credit conditions have tightened, according to a study by the Asian Development Bank (ADB).

The November issue of ADB’s Asian Bond Monitor showed the Philippine corporate bond market growing by 21.94% by the end of the first half from end-December, outpacing the 6% expansion in emerging East Asia.

It churned out a volume of P260.37 billion in the first six months of the year, faster by 29.27% year-on-year. Volume in the first half of 2007 only amounted to P201.42 billion.

The local currency corporate debt market accounted for more than 10% of total bond issues that included government securities in the first half, rising steadily from only 7.8% in 2006.

Corporate bond issues represented 3.72% of the country’s gross domestic product as of the first semester, a two-fold increase from less than 2% three years ago, according to the ADB report.

"Amid tight credit conditions on international debt markets, corporations opted to finance through the peso market," read the report.

New issues of peso-denominated corporate bonds in the first half reached P43.1 billion, accounting for about 17% of total corporate bonds outstanding.

A large chunk of these issues were subordinated notes floated by banks, including the Banco de Oro Unibank, Inc., the Land Bank of the Philippines and Rizal Commercial Banking Corp., as well as Lucio Tan-controlled Allied Bank and Philippine National Bank, the ADB said.

Only two local firms — First Gen Corp. and SM Investments Corp. — issued debts denominated in dollar in the first half, it added.

First Gen raised $260 million of five-year convertible bonds in February, while SMIC issued $350 million worth of debts of similar tenor.

The study did not take into account recent corporate bond issuances by the Ayala group.

Two other banks — Bank of the Philippine Islands and Security Bank Corp. — have recently announced plans of a subordinated debt offer, indicating that appetite in the domestic corporate bond market has yet to fizzle out.

Eduardo V. Francisco, president of BDO Capital — one of the country’s most active bond arrangers — noted that banks had to raise more capital to keep pace with rising loan demand and to comply with stricter Basel 2 rules.

"Banks have to strengthen their capital base because that’s part of Basel," Mr. Francisco said.

"Also, our loan growth is coming from a low base because during the Asian crisis corporations were a bit gun-shy. The corporates are now ramping up, doing capex that they have to fund. As corporates increase borrowing, banks also have to raise more capital to cover these assets," he added.

Borrowing from the international capital market is becoming less and less attractive after foreign banks began locking their doors as the global financial crisis escalated.

"It’s going to be harder borrowing offshore because of country-risk issues. We’re relying on our own markets. There’s a lot of liquidity on the peso side," Mr. Francisco pointed out.

The same ADB report said Asia’s local currency bond markets have shown resilience to the global credit turmoil and can be a key source of funds for governments looking to finance expansionary fiscal policies to offset an anticipated economic slump.

"Domestic borrowing is likely to increase as funding becomes harder to access on the foreign market," Jong-Wha Lee, head of ADB’s office of regional economic integration, said in a statement.