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Philippine peso debt: more than a yield play

Investors are increasingly prepared to take raw Philippine-peso risk, according to a survey of bond buyers conducted by FinanceAsia, Citi and BPI Capital.

Attracted to high bond yields, 76% of fixed income investors polled by FinanceAsia in October said they planned to increase their exposure to Philippine debt in the next 12 months. The result is a strong endorsement for a country that has quickly built a reputation in the Asean region as a valued fixed-income market.

More than just a yield play, the Philippines offers bond investors access to some of the strongest corporates, property companies and financial institutions in the region.

To learn more about institutional investor attitudes towards Philippine debt securities, FinanceAsia joined with Citi and BPI Capital in October to conduct a survey. Participants were asked to provide information on allocation strategies and investment preferences, and to share their views on the importance of hedging and the intricacies of choosing a counterparty bank.

More than 58% of those surveyed said they currently hold Philippine fixed-income securities and 70% of these said they already invest in peso-denominated paper. Of those respondents who currently don't hold Philippine bonds, 60% said they would consider investing, with just over half of them mulling it within the next 12 months.

We are pleased with the feedback and excited about what the results say about future prospects,” said Dennis Montecillo, president of BPI Capital, the investment banking division of the Bank of the Philippine Islands. “Five years ago local companies had no alternative but to issue in US dollars if they wanted to attract foreign investors but this poll shows investors are now prepared to take raw Philippine-peso risk.”

The popularity of the Philippines as a fixed-income investment destination is evident in historic transaction volumes. In the first nine months of this year a total of Ps159.5 billion ($3.55 billion) was raised in the domestic bond market compared with Ps83.5 billion in all of 2013.

The poll results indicate that nearly 70% of investors had either slightly increased or significantly increased their exposure to Philippine debt securities in the past 12 months. More than half of all active investors now hold both government and corporate paper.

Asked to indicate which sector they are most interested in, investors pointed to consumer goods (19.3%), utilities and infrastructure (17.2%), financials (14.1%), telecommunications (12.5%), and oil and gas (8.3%).

Commenting on the results, Citi’s head of banking in the Philippines, Usman Ahmed, said the interest in the consumer sector is not surprising. “The Philippines is a consumption-driven economy,” he said. “Several of the large conglomerates have exposure to the consumer sector either through manufacturing, retail or indirectly via banking and property assets.”

The poll asked participants what changes to current market dynamics would likely encourage them to increase their allocations to the Philippines. Aside from higher yields – which is a perennial plea of fixed-income investors – the respondents also listed improved liquidity and access to foreign exchange or interest rate hedging products. For corporate bonds, specifically, they would like to see better credit rating analysis of issuers and more research.

Montecillo is aware of liquidity concerns and expects the market to deepen as companies favour larger issue sizes. BPI Capital was joint lead underwriter and joint lead manager on a Ps30 billion bond deal for JG Summit in February, making it the largest peso bond deal in the country in four years. The diversified conglomerate initially wanted to raise Ps20 billion but was able to increase the final sum on the back of strong demand. It priced the three-tranche deal at the tightest end of the spread range.

Market innovation

One of the most intriguing results from the poll was an indication that investors are interested in buying new peso-denominated products outside of straight corporate notes and bonds. Respondents indicated they would consider investing in asset-backed securities (44.2%), mortgage-backed securities (19.7%) and project finance bonds (36.1%).

“This was a standout result and could lead to a fascinating convergence of supply and demand,” Montecillo said. “It opens the opportunity for financial issuers to liquefy their asset-backed portfolios and gives infrastructure sponsors another avenue for funding their projects.”

Eric Luchangco, head of debt capital markets at BPI Capital, said the high level of potential interest in project finance bonds was particularly surprising given the general dearth of these instruments in Asia. “To date the idea of tapping the bond markets to fund projects has been limited to the US and Europe, so this is a really strong indication that investors are ready to welcome new ideas.”

Project finance bonds fit the long-term horizon of many fixed-income investors, Ahmed said. “The project finance market has predominately been a peso loan market which makes it fairly illiquid. If these projects could be funded through the capital markets they would over time attract new domestic and international capital market investors.”

To view the full poll results in FinanceAsia’s November issue, subscribe here.

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