Why is JG Summit raising more debt?

Does a new $300 million eurobond presage a second bid for PLDT?

A larger than expected $300 million five-year deal was priced last night via sole lead JPMorgan after Morgan Stanley withdrew due to a conflict of interest.

Having gone out with guidance for a $150 million deal, the transaction was upsized on the back of four times oversubscription. In order to maximise demand, however, the borrower appeared to have decided to cede ground on pricing, as the bond came at a wide historical pick-up to the sovereign curve and relative to its own subsidiary Universal Robina Corp (URC).

After a three day roadshow that began in Manila on Friday, the deal was priced at 99.496% on a coupon of 8.25% to yield 8.375% or 631bp over Treasuries. Fees total 95bp.

This represents a roughly 236bp pick-up to the sovereign curve, given the Republic has an April 2008 bond currently yielding about 6% or 395bp over Treasuries. The last time JG Summit raised financing in its own name back in January 2002 it came at a 128bp pick-up to the sovereign. This resulted in the launch of a $100 million 9.25% four-year deal via ING.

Then in January this year, URC completed a $125 million five-year issue via Citigroup and ING, securing pricing at a 118bp premium to the interpolated curve. This deal has a 9% coupon and has also since widened against the sovereign to trade at a yield of 8.08% or about 587bp over Treasuries.

Maximising the issue size of the new deal is only likely to further fuel speculation that JG Summit is once more talking to First Pacific about PLDT. The Philippines press recently reported that the two have re-entered discussions about a 26% stake, valued around the $400 million mark without a premium to PLDT's current share price. JG Summit has since declined to comment.

Analysts argue that premium pricing would place a heavy burden on JG Summit's balance sheet. In a recent research report, UBS Warburg, for example said it believed, "the impact on JG Summit could be viewed as credit negative, particularly if it paid a significant premium over current market prices."

The bank added that there was limited scope to leverage up and remain comfortable given total debt of $1.17 billion, EBITDA of $295 million and a debt/EBITDA ratio of 3.95 times (FY01).

The new bond did benefit, however, from a slight firming of Philippine bond spreads during Asian trading on Wednesday following strength in Latin American spreads in New York night. Earlier in the week, the whole sovereign curve had been hit by rumours that Fitch is about to follow Standard & Poor's lead and cut the sovereign rating from BB+ to BB.

Observers report that the deal saw wider distribution that would normally be expected with the Philippines accounting for just 13%. By contrast, Hong Kong took 37%, Singapore 33%, Europe 15% and offshore US 2%.

There was also a healthy showing by private banks chasing yield and by investor type, private banking comprised 54%, asset managers 28%, banks 16% and insurance companies 2%.

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