Just over a week ago, Globe Telecom set an important new benchmark for Philippines' corporate paper, with the pricing of its first international bond deal in nearly three years. With Salomon Smith Barney as lead manager, the BB/Ba3 rated group raised $200 million from a 10 non call five offering with pricing at par on a coupon of 9.75% to yield 442bp over Treasuries. Terms were aggressive and demand was strong, with Philippines investors alone enough to cover the book before global roadshows even began. It all showed just how far the group has come from its debut foray in the international debt markets back in July 1999 when Salomon again led a $220 million bond issue for the group, then rated only B+/B1 and priced at 709bp over Treasuries to yield 13%.
CFO Delfin Gonzalez Jr has been at Globe since November 2000 and presided over a company which has grown subscribers from 900,000 at the beginning of 2000 to 4.6 million by the end of 2001. Recently voted most impressive CFO in the Philippines for FinanceAsia's annual best companies survey, he talks here about his most recent foray to the international debt markets.
FinanceAsia: You must be very happy with your latest bond deal?
Delfin Gonzalez: Yes, we were very very pleased with investors' reception to the deal. From the outset, we thought it was important to do a full global roadshow and covered about nine or ten cities across Asia, Europe and the US. The primary thing we noted was just how dramatically investors have revised their perception of the Philippines since the middle of last year and the change in government. Specifically, a number of investors told us of their confidence in the President and their belief that she understands the problems of our country and the solutions that'll be required. The turning point seems to have been when she went to the US last November.
The second thing was the way that investors regard Globe and the fact that they see us as a fairly conservatively managed company. Not only in terms of operating performance but also in the way the balance sheet is managed. We have always made sure, for example, that don't overextend ourselves. And aside from the fact that Standard & Poor's upgraded us twice last year, Moody's has also just put us on positive outlook. This added to the positive momentum behind the deal and helped us secure a couple of key institutional accounts that we really wanted to come into the deal.
Demand for the deal was very strong and you could have placed the entire amount in the Philippines. How important to you was the international distribution?
Oh it's key. We need to make sure Globe can continuously access capital from the markets, that the door is always open to us. The Philippines on its own is a small market.
Nevertheless you still managed to achieve exceptionally tight pricing - only 50bp over sovereign paper. Was this your main benchmark?
That's right pricing was tight. The main benchmark was the Republic of the Philippines' 2017 bond puttable in 2012. When that deal was launched in January this year with a coupon of 9.375%, we were getting feedback that our pricing should be about 100bp over this level. One of the main reasons why we eventually were able to come through this level is because of the strong demand from Asia outside the Philippines. I'd always thought that Asian accounts were more interested in the five to seven year maturity range, but they wanted 10 year paper as well.
We also had good demand from Europe and the participation of some key accounts that had also participated in our 1999 offering. Of course, the big driver was the US where demand for 10-year paper is traditionally strong.
I have to say I was quite surprised we were able to achieve 50bp over the sovereign and part of the credit should go to the team at Salomon who helped us position our credit so well. When we did the 1999 deal, I wasn't at Globe then, but the deal came about 300bp over the sovereign. It's not really very liquid any more and the feedback I'm getting from the market is that investors view it as a two-year rather than a seven-year deal. They expect us to call it when the option falls due.
Why do you prefer a 10 non call five structure over a straight 10-year? It is more expensive.
We prefer it because it gives us an option to call the bonds if our rating gets upgraded to the investment grade level. There's quite a wide gap between the spread levels of investment grade and non-investment grade paper. I'd say the option probably cost us between 0.125% and 0.25% but we think it's a small price to pay should we get upgraded.
What sort of covenants did the deal incorporate?
The main difference between this deal and the last one in 1999 is that we have a better credit rating now and were able to insert covenant suspension provisions in the event that Globe becomes investment grade rated. But we are still a long way from breaching the covenants of our 1999. The main one is a maximum debt to EBITDA ratio of five times and debt to equity ratio of two times.
Our capex peaks in 2001 - 2002 and that should be the peak of our gearing levels too. At the end of last year, we reported a gross debt to equity of 100%, gross debt to EBITDA of three times and EBITDA to interest coverage ratio of 4.6 times. The average maturity of our debt is also probably four to five years.
Do you need to come to the markets again this year?
We have a $650 million capex plan for 2002 and are now pretty much fully funded. We probably only need another $100 million or so.
When I interviewed you last year you were very keen on the idea of doing a convertible bond. What happened?
We decided against a convertible because we didn't think it would be cost effective. It also wouldn't solve the immediate liquidity problem we had with our shares.
Have you been able to increase turnover through other means?
Two things happened last year. Firstly in the middle of the year, our share ownership was opened up to foreign investors again. Previously the foreign limit had been full. But the acquisition of Islacom and capital restructuring this entailed released new shares. Secondly the PDRs were no longer necessary and a lot of investors converted into common shares. Liquidity improved and the market broadened, but the overall level of activity is still relatively low. At some point, we definitely need to issue new shares into the public market to get our free float up to the 30% mark. It's at 20% currently.
The other issue is the fact that most of your funding is in dollars, but your revenues are mainly in pesos. What's your current hedging policy?
We continue to be very active in the swap market. About 38% of our total debt has been swapped into pesos, down from 62% a couple of years ago. In addition we have a natural hedge as we generate a significant amount of dollar-linked revenue. Last year, for example, this amounted to $153 million, or roughly 23% of total revenues. Optimally we'd like to have a 50/50 balance between peso and dollar liabilities.
Getting an investment grade rating is also obviously very important to you. How achievable do you think this is going to?
Achieving the sovereign rating is the first step and at the moment we are rated one notch below. Obviously a lot hinges on what happens to the sovereign rating, but generally speaking we hope to have a full investment grade rating in a couple of years.