Retreat from Fort Bonifacio?

ING Barings has been mandated by Metro Pacific to sell its crown jewel

In further evidence of an Asian company mismatching its debts with its cashflows, Metro Pacific of the Philippines is to sell its crown jewel, Bonifacio Land Corp.

ING Barings has been mandated to advise on the sale.

Metro Pacific, which is 80.6% owned by Hong Kong-listed First Pacific, looks like it will be forced to sell Bonifacio Land  in order to pay back a $90 million bridge loan to the self-same First Pacific, due in December.

First Pacific made the bridge loan in April when Metro Pacific saw investors redeem an $80 million convertible bond. It was forced to step in to avert a funding crisis at its subsidiary. But Metro Pacific, a Philippine property company, is still being dragged down with over $200 million of largely short term debt.

The company's debt position has thus far restrained it from developing office buildings in the Fort Bonifacio area, where it controls 155 hectares of prime real estate, that is next to the valuable Makati business district. Local analysts reckon only around 10% of the Bonifacio area has been developed thus far.

Since 1996 Metro Pacific has ramped up it debt, partly because it has done such a good job of building roads, sewage systems and other essential infrastructure to turn the former military base into a viable commercial development to rival Makati.

With no cash to put up new buildings it has found itself in the cashflow equivalent of a catch-22. This situation has been made more pressing thanks to the fact that it has short term debts, and the pending loan repayment to its parent is in three months.

A spokesperson for First Pacific said the object of the Bonifacio sale would be to better align Metro Pacific's short term debt profile with its long term real estate development ambitions.

However, if a controlling stake in Bonifacio Land was sold, the remnants of Metro Pacific would resemble little more than a shell. Thus far, to reduce its debt, Metro Pacific has already sold its non-core elements: Metro Bottled Water, its shares in Smart Communications; Metrovet and Steniel Manufacturing.

Minus Bonifacio Land - its crown jewel, and principle asset - Metro Pacific would be left with Negros Navigation, First e-Bank and the property assets of Landco Pacific.

At this juncture, it should be stated that crown jewel or no, selling Bonifacio Land may be no sure thing. Philippine property is in a sluggish state right now with local analysts saying that even excellent new buildings in Makati such as the 100,000 square metre RCBC Plaza is less than 50% occupied.

Last week, Metro Pacific did send out a signal that it wasn't desperate when it rejected a bid from Ayala Land to buy 18 hectares of Bonifacio, deeming the price too low.

However, with excessive supply, and local banks repossessing office properties, the buyer of the Bonifacio property may have to take a long term view and put it in a landbank, developing it as and when the property market gradually recovers in the next five years.

Developers who may show an interest may include Filinvest Land, Robinsons, Penta Capital, SM Prime and Megaworld (although the latter has never committed to a development greater than 15 hectares in size - a fraction of the Bonifacio site). Foreign interest in the Philippine property market has thus far been limited to Singapore's GIC Real Estate Fund.

According to the First Pacific spokesperson, Metro Pacific will seek to reduce its debt through either selling a controlling stake in Bonifacio Land, or via a partnership with a developer. The spokesperson says there are several options, and that Metro Pacific has raised some of the $90 million it needs to repay through land sales and moving units in its Pacific Plaza in the course of the year.

The spokesperson says the most pressing need is to repay the $90 million to First Pacific, as the other short dated debt is with local banks and may be rolled over, since it is still being serviced.

An interesting question, however, is how First Pacific got itself into the position of lending its subsidiary $90 million, thus doubling an already large debt position. In return, First Pacific prudently took as collateral the majority of Metro Pacific's stake in Bonifacio Land.

First Pacific stepped in when its subsidiary's convertible bond was redeemed by investors, and used proceeds from its sale of First Pacific Bank to give Metro Pacific a very attractively priced loan (15% is an attractively priced loan in the Philippines).

First Pacific's institutional shareholders may now wonder about the logic of this loan, although at the time it was granted the Philippines looked to be on the up after the fall of Estrada. Without its parents cash, Metro Pacific would have possibly suffered a severe, possibly terminal situation, and in the event, the money made it possible for the group to hold onto Bonifacio. A rising property market would have made this a very sensible call.

Unfortunately, the property market has not done well, and in Casino-terms, the doubling of its bets has led to the situation where it is now forced sell the prime asset, Bonifacio, in absolutely awful markets - and in a situation where every canny buyer knows it is a forced seller.

The First Pacific spokesperson admits that if were to extend the loan beyond December, it would have to return to its shareholders for approval. And if it was not at all apparent that Metro Pacific had the capacity to repay the loan it would have to ultimately seize the collateral and put its subsidiary into bankruptcy.

The spokesperson says the collateral is sufficient to cover the $90 million loan.

What must be galling for First Pacific's self-same shareholders is that due to chronic liability mis-management, the subsidiary has got itself into a position where it has built an area that could in future be the lucrative equivalent of Ayala's Makati, but which is being sold instead at the bottom. Whoever the buyer is will see all the upside and benefit from all the excellent work Metro Pacific has done on building Bonifacio's infrastructure.

Life is hardly ever fair, some say. But for those who don't match their long term assets with their short term liabilities, the downfall is normally self-imposed.

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