SM Investments raises $350 million in five-year bonds

SM Investments Corp (SMIC) maintains its status as one of a select handful of non-government affiliated Philippine companies with access to the international high-yield market, having just completed a $350 million five-year deal. The size of the current deal, which has a three-year put option, has in the past 10 years only been exceeded by National Power Corp (Napocor), a government affiliated company. Napocor issued two $500 million bonds in 2000 and 2006, as well as a $400 million deal in 2003, according to data from Dealogic.

UBS was the sole bookrunner for the SMIC deal.

The deal was sold at par and priced with a fixed coupon of 6.75%, 305.7bp above the three-year mid-swap rate last Thursday, and at the mid-point of a guidance range of 6.625%-6.875%. At the time of pricing, the February 2011 sovereign yielded 5.785% and the February 2013 yielded 6.655%. In the corporate sector, JG Summit's 2013 issue was trading at a yield of 7.667%.

The coupon is the lowest among the top 10 Philippine deals by size since 1995, which include government-affiliated companies. Banco de Oro Universal (an affiliate of SMIC) and Globe Telecom have gone to the market with lower coupons of 6.5% and 6% in 2003 and 2007 respectively – but at $150 million and $104 million they don't qualify as top 10, according to Dealogic.

The offer attracted 30 accounts and $450 million worth of orders after a roadshow last week in Hong Kong, Singapore and London.

Fergus Edwards, head of Asia debt syndicate at UBS, says the deal was well anchored by the domestic bid. About 50% went to investors in the Philippines, while 24% went to the rest of Asia, and 26% to Europe. European demand was on the high side compared to past deals, according to Edwards, and was helped by the company's strong earnings, which have flourished in proportion to the dollar earnings being repatriated by overseas workers. SMIC has business operations in retail, real estate and finance.

“Ultimately the deal saw a broad geographic spread of investors; this is partly because those outside of the Philippines were aware of the firm domestic bid for a company with such high local visibility,” Edwards says.

The company also has solid financials. At the end of June, SMIC had Ps30 billion ($666 million) in net debt, against total assets of around Ps233 billion. Earnings are expected to grow 13%-14% this year from Ps12 billion last year, according to company pronouncements.

In terms of investor type, 16% of the deal went to asset managers, 34% to banks and 50% to retail investors.

“The pattern of this execution was similar to the Asian deals of the early 2000s, when local credits depended on significant domestic demand to reassure international accounts that there was a core group of investors who would want exposure to the credit in good markets and bad,” adds UBS’s Edwards. (Since then, investors have become far more comfortable about holding Asian corporate debt, and they often make up a majority of the deal.)

The deal allowed SMIC to raise its profile with international investors, helped secure money to refinance its debt, and replaced its $300 million, 8% five-year dollar bond which matured in 2007.

The Reg-S approach was the opposite strategy of that used by India-based Vedanta Resources, which came to the market in late June with a blockbuster 144A deal that did quite well in terms of demand, but has traded poorly since then. Some observers argue that deals from the Asian high-yield sector do better if they have a strong domestic component.

The deal’s timing would appear to have been excellent, coming just before media reports of the difficulties facing Fanny Mae and Freddy Mac in the US; however Edwards argues that it was more important that the Philippine sovereign continued to trade well throughout the execution.

“The sovereign has been trading tightly compared to its emerging market peers, and much of the recent news regarding inflation rates and potential rate hikes had been priced in,” he says.

Indeed, for the month of June, the inflation rate in the Philippines reached a 14-year high of 11.4%, and the central bank is expected to continue to raise interest rates, after raising its benchmark rate by 25bp for the first time in two years last month. The fact that domestic interest rates are on an upward trend may also have prompted the decision to seek dollar borrowing. SMIC's chief financial officer, Jose Sio, told media in Singapore that the company would have to pay around 10% for raising equivalent funds in the domestic market. (That’s assuming the country’s relatively undeveloped bond markets would have been able to absorb such a large offering – an unlikely prospect.)

The change in macro conditions of the country has been sharp. As late as September 2007, the Asian Development Bank projected inflation would drop to 2.9% in 2007 and reach 3.5% in 2008.

One potential fly in the ointment is the steady weakening of the peso since the beginning of the year. The domestic currency has softened from 41 to just under 46 to the dollar year-to-date - although two years ago, the peso stood at 53. The upside of a strengthening dollar from SMIC’s point of view is that overseas remittances will benefit from greater purchasing power and thus boost the company’s sales.