Manila IPO slowdown pinned on regulators

A conference in Hong Kong looks at how practices in the Philippines could be improved to make it easier for companies to list on the local stock exchange.

Listing shares in the Philippines is an arduous task at the best of times and regulators should meet soon to discuss how best to streamline the process, a conference in Hong Kong was told on Tuesday.

Despite a positive backdrop — the Philippines gained investment grade status in 2013 and its economy grew by 5.7% in 2014 — new issuance has been slowing on the Manila stock exchange, delegates at FinanceAsia’s Philippines Capital Markets Forum heard. 

“The number of [initial public offerings] has been underwhelming considering the phenomenal growth we’ve had in the past few years,” James Grandolfo, a partner at Milbank, told the gathering of bankers, company executives, asset managers, and regulators.

Just $5 million has been raised from IPOs year-to-date compared with a still-measly $316 million in 2014 and $1.38 billion in 2013, according to Dealogic data.

With the Philippines economy continuing to expand at a fizzy 5.2% in the first quarter of this year, that sharp slowdown in local listings is partly due to regulatory issues.

“It’s not the easiest market to do an IPO. There are a lot of fees [and] lots of timing issues,” Grandolfo said at a panel discussion on the Philippines equity market.

Getting banks, exchanges, regulators, and prospective issuers together in a room to discuss the issues is paramount, he argued. “I know, as a practitioner, [that] I haven’t been invited to discuss the challenges of getting these deals done, which would be a beneficial process to make it easier for companies to come to market,” Grandolfo said.

Reggie Cariaso, head of equity capital markets at BPI Capital Corporation, echoed his sentiment: “There [is] no scarcity of good companies. We’ve seen from the recent growth in the Philippines [that it] has increased the opportunity to grow [small- and medium-sized enterprises]," he said. "[But] there are challenges from the [structural] side that have prevented many companies from listing.”

Improved valuations

Strong economic growth has lifted valuations, which in turn is encouraging well-known family-run businesses to consider a listing. Such considerations, for a time, have the potential to put other issues to the side, Cariaso said.

But it just doesn't seem to be happening, even though the Philippines stock market has undoubtedly come a long way.

Back in the 1990s, local investors only accounted for 30% of the local stock market, which led to high volatility. Now they make up between 50-60%, offering more stability. Year-to-date, the country's bellwether PSEi Index is up 4.4%. It has jumped by 176% since 1995.

“Today things are very different,” Philip Hagedorn, investment director and portfolio manager at ATR Asset Management, said. “The boom and bust cycles are over. The foundation of the local stock market today is very geared towards local investors.”

Turnover has also increased substantially. Twenty years ago the average daily turnover in the Philippines stock market was only $10 million a day. It currently stands at $200 million.

However, it seems clear that the exchange has to make some changes if more family-run companies in the Philippines are to come to market.

So what sort of changes must the exchange implement to help facilitate further growth? That was the question posed by Roel Refran, chief operating officer of the Philippines Stock Exchange.

For Grandolfo the answer is clear: the entire IPO process has to be streamlined.

In order to list currently, a company has to get approval from both the Securities and Exchange Commission and the Philippines Stock Exchange. “At the moment, the SEC meets once a week and the PSE twice a month,” Grandolfo said. “You can imagine how [difficult it is] to get this done before your financial statement goes stale.”

Cariaso also suggested the exchange allow companies shelf-registration for all fixed income and equity transactions. “That will allow companies to rapidly access capital markets at a lower cost,”  he said.

Educating the regulators is key. And while mirroring other cities’ exchanges is not necessarily the answer, there are still lessons to be learnt from jurisdictions such as Hong Kong and Singapore, the conference heard.
“There has been a very long period where regulators have not taken a hard look at the system,” Grandolfo said. “They can streamline the timing to make the execution a lot easier.”

Also important for ATR's Hagedorn is tighter surveillance to counter potential market abuses and tax evasion. “We’re a growing market and it’s been difficult in the past without the technology. Now the exchange has improved the technology. This adds significant credibility [and makes] surveillance and aggressive prosecution [easier],” he said.

Still, while IPO activity has petered off, block trades have been more frequent.

In 2013, some $4.46 billion was raised via 18 deals in the Philippines, compared with $2.31 billion in 2014 and $1.87 billion year-to-date up to June 23, Dealogic data shows.

“We’re starting to see medium [-sized] companies show up on the pre-approved list to allow them to do an overnight block trade,” Cariaso said. “It’s a powerful tool for a company to raise capital and take advantage of market conditions when they’re right."

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