Can you tell us about the $300 million Eurobond for JG Summit you priced last week via JPMorgan?
Sebastian: The main purpose was for re-financing. We have a $300 million convertible maturing in December and a $200 million Eurobond in March next year. We started planning our return to the international bond markets last November, because we always want to make sure we can meet re-payments at least a year in advance.
But I should also point out that the actual amounts outstanding on these bonds are quite low because we've bought a lot of bonds back There's only $100 million of the convertible left and $50 million of the Eurobond.
Do you think you've timed the JG Summit bond well?
Yes, we knew it would be a good time to go, since there's been a lot of liquidity and strong demand for Philippine paper. We also knew there were a number of deals stacking up behind us from Napocor and PLDT and thought the ROP curve had tightened beyond where it deserved to be on a fundamentals basis. We knew the next wave of demand would focus on the corporate sector and wanted to hit it. So we were very pleased, but also surprised by just how strong demand was.
But you priced at quite a wide premium to the sovereign curve - 236bp compared to 128bp when you last completed a deal in January 2002?
I agree, but we thought the sovereign curve was too tight and would widen again. And in fact it has come off a bit in the last week, so the differential between us has narrowed.
And now we have a different problem - what to do with the excess cash generated from upsizing the bond to $300 million. We don't want to incur a big cost of carry.
There's been a lot of speculation that you were raising the money to make a second bid for PLDT?
No, absolutely not. That's all in the past. We've already make significant investment in our own wireless business since then. There have been no talks with First Pacific. It's all local gossip.
And what of the $125 million for your food and beverage manufacturer URC (Univeral Robina Corp), which you completed in January via Citigroup and ING?
The timing on that deal wasn't very good, but at that point we didn't know whether market conditions were going to get any better since there was a war looming in Iraq. It wasn't a very happy experience, but our bankers managed to get it through, so that was good.
You've recently increased the dividend pay-out ratios for both URC and Robinson Land. Why's this?
These are both very cash generative businesses and so the board of directors recently approved an increase in URC's dividend from Ps0.05 per share to Ps0.30. This should release about Ps500 million. For Robinson Land, the dividend has gone up from Ps0.005 to Ps0.05 per share.
Until quite recently, dividend flows from the two companies were quite small because of capex requirements, which meant we needed to keep cash in the business. From 2000 until late last year, for example, URC was expanding quite aggressively in the Asean region. We built plants in Shanghai and Indonesia, so there was quite a bit of capex involved.
So capex has now peaked?
Yes we're fully spent out for about six years, so URC should start to generate a lot of free cash flow. We now have a critical mass of assets, which means we can move some around whenever we find a gap in any of one of our manufacturing operations. We've now based in six Asian countries - Thailand, Malaysia, Indonesia, China, plus we have sales and marketing operations in Singapore and Hong Kong. We've also said that we'll probably set up a seventh base in Vietnam, but this facility will only cost $6 million to build.
What percentage of your revenue base is now derived from overseas?
For the last financial year, it was about 16% and should rise to north of 18% over the coming financial year.
How does this affect your currency strategy?
It has a big impact. Most revenues are denominated in local Asian currencies, but this is still good because they're all stronger than the peso. Generally speaking we keep about 95% of URC's cash and near cash equivalent assets in US dollars. We also seek to maintain a substantial level of US dollar liquidity.
Based on what you've said, your credit ratios should be improving over the next few years.
Yes I believe our credit ratios will actually get stronger rather than weaker. Where JG Summit is concerned, debt to equity is still fine and nowhere near the 1.5 cap imposed by a covenant in the 2006 Eurobond. And even with the proceeds from the new bond, I believe gross debt to equity will still fall below 1.3 times. On a net basis, we're at 0.9 times. The interest coverage ratio has moved from about 3.3 times pre bond to 2.6 post bond.
For URC, we're running a gross debt to equity ratio of 0.6 times and interest coverage ratio of 3.9 times.
So you won't be raising much more money from the international bond markets then?
We're pretty much done now unless of course a fantastic market opportunity presents itself.