THERE’S a smile on the face of investment bankers nowadays.
The mirth among investment bankers may be due to companies’ fund-raising tack in the first half of the year. Fund-raising during this period was up and more brisk compared to the same period in 2016.
Last year, however, was when the Philippines held its presidential elections, a time when many companies hold back on fund-raising activities due to uncertainty on who will lead the country.
Fund-raising only resumed this year, led by the listing in early February of the P10-billion fixed rate bonds of Ayala Corp. at the Philippine Dealing and Exchange Corp. (PDEx). This was followed by the P7.5-billion initial public offering by end-March of Wilcon Depot Inc.
By June, a total of P82 billion were raised at the PDEx system, which was just P23.3-billion shy of last year’s P105.3 billion in total funds raised at fixed income market. Seven companies listed, including conglomerates San Miguel Corp. and shopping mall operator SM Prime Holdings Inc.
For the equities market, a total of P107 billion were raised, including the follow-on offering of lenders BDO Unibank Inc. and China Banking Corp. and of fruit canner Del Monte Pacific Ltd. Adding to the kitty were proceeds from the initial public offering of three firms. The funds raised from these trading activities were almost double compared to the P56 billion fetched at the PSE last year.
Curve ball
COMPANIES are racing to raise money as interest rates started to rise likewise with the US’s as the economy of the world’s largest economy showed signs of recovery.
According to data from First Metro Investments Corp., coupon rates for the five-year debt paper increased to 5.0449 percent 93 basis points higher than last year’s 4.1133 percent. The seven-year paper also increased to 5.2463 percent from last year’s 4.59 percent, while the 10-year debt rose to 5.4931 percent from 4.6334 percent.
According to Justino Juan Ocampo of investment bank FMIC, there were predictable “moving parts” during the first half of the year that resulted to more fund raising activities. Still, Ocampo, FMIC’s executive vice president, said the market is still liquid, making it a right time for firms to raise funds during the second half.
“For bond issuers, we see that it’s still a very good time to tap the fixed-income market while we anticipate an upward inclination for rates but it’s pretty much benign,” he said.
However, there came a curve ball from the economic team of President Duterte.
Recalculating mode
THE Duterte administration has proposed to use more of the official development assistance (ODA) on many infrastructure projects. “The fact remains that we have an infrastructure deficit in this market,” Ocampo said. “We anticipate, however, that with a new model, with a hybrid PPP [public-private partnership] model, conglomerates are in recalculating mode. This is like Waze [a traffic application in mobile phones]; this is like recalculating, navigating where to go with a new paradigm.”
It may still be a liquid market but FMIC, which has been active in major fund-raising deals in the country, believes there should be more creativity on how to package and raise money to bankroll a project.
Conglomerates may now be looking at unsolicited proposals or PPPs in partnership with the local government units. “Also in terms of creativity, probably for private sector like us, maybe there could be room to explore equity,” Ocampo said. He cited as example an infrastructure fund “where you could put together a consortium of infrastructure inclined companies or groups to take part in the infrastructure growth.”
“And as conglomerates, we anticipate growing in existing infrastructure assets in terms of mergers and acquisitions.” Ocampo added. “There could be consolidation and acquisitions.”
Better scheme
FOR Dante Tinga Jr., BDO Nomura’s senior vice president and head of research, the ODA approach to fund infrastructure projects maybe a better scheme.
“We’re not talking about building projects in the most efficient and cost effective way, right? We’re talking of building projects quickly,” Tinga told the BusinessMirror. “The government had always borrowed cheaper than the private sector. The
government doesn’t have to worry that these projects have adequate rates of return. The government doesn’t have to worry about regulatory risks. Those are the three things that are problematic in PPPs.”
Tinga explained this is different with the private sector.
“They have their own shareholders to worry about. The shareholders will demand that these projects will get their rates of their return, that projects be protected from regulatory risks,” he said. “So in general, everything else equal, ODAs will get projects built faster because government funded [these] cheaper.”
Tinga said investors are willing to invest in the Philippines because of the long-term growth prospects of the country.t
“When we go to clients, we have to provide them good growth stories. The Philippine index is trading at a price-earnings multiple that is higher than other parts of Asia. The simple message here is Philippines is not cheap. That’s one problem we have when pitching ideas to clients,” Tinga added. “They like the growth story for Philippines but they worry about the valuation.”
Stock price, in relation to its earnings ratio or multiples, is the typical valuation that investors use when they look at stocks to invest in.
Tax and investments
PART of bankers’ pitch to investors is the ability of the Duterte administration to pass the Tax Reform for Acceleration and Inclusion (Train) bill.
“With regards to the impact on stocks, we generally take a conservative view on outlook for Philippine equities,” Tinga said. “We have yet to assume the implications of tax reform and accelerating infrastructure spending in our numbers.” Tinga recommends investing on property firms, mid-cap companies, small-cap consumer firms, conglomerates and industrials if tax reform ensues.
Meanwhile, Cristina Ulang, assistant vice president and head of research of FMIC, picked conglomerates as her stock pick saying these offer higher dividends.
“We like the banking industry, because GDP is strong, loan growth is strong and running at 20 percent and it is expected to be sustained in two years’ time,” Ulang said. “So the banks are going to benefit from a very strong economic growth.”