The funds must flow: Capital raising in the time of crisis

By Mark T. Amoguis, Assistant Research Head

THE UNCERTAINTY caused by the coronavirus disease 2019 (COVID-19) pandemic has pushed some big firms and investors into the defense by cutting back on capital-raising activities and retreating towards safe-haven investments. Despite the pandemic, raising funds through capital markets is still possible, analysts said.

Net losses reported so far this year has led some of the country’s corporate giants to announce cuts in their capital spending. These cuts vary among firms and industries, ranging from as low as 30% to as high as 60% relative to levels in the previous year.

“Cutting costs is a normal reaction for companies in the midst of an economic crisis. However, companies, particularly those in the industrial and consumer services, should look at the current economic slowdown as an opportunity to challenge themselves to adopt innovative practices to keep up with new normal instead of waiting out the pandemic,” Philippine Stock Exchange (PSE) President Ramon S. Monzon said in an e-mail.

Amid the lingering uncertainty over the COVID-19 crisis, Mr. Monzon said bank financing continues to be among the easiest options to secure funding given low interest rates.

“However, as the risk of loan defaults increases because of the pandemic, banks are pressured to raise interest rates and be more circumspect in increasing their loan exposure to both corporations and individuals,” he said.

In a separate e-mail, SB Capital Investment Corp. said the pandemic has not changed the available funding options whether it be through debt or equity.

“As always, the viability of tapping those markets hinges on finding the right balance of risk versus return for investors/lenders. Sources of funds are generally the same with some just moving its mix,” SB Capital added.

For First Metro Investment Corp. (First Metro) President Patricio Dumlao, tapping the equity and debt markets remain “very viable and accessible.”

“Investment bankers continue to do their work, helping out companies in their fundraising through USD denominated and local currency bonds issuances and other financial instruments that suit client needs. The regulatory environment is very supportive. Market liquidity is ample, enabling market absorption,” he said.

Mr. Dumlao said that so far, First Metro has done 11 capital market transactions and currently working on four others compared with 18 in 2019.

With the previously dormant funds locked in the big banks’ reserve unleashed to the financial system, domestic liquidity grew 14.5% in July from 6.9% a year ago, preliminary data from the central bank showed.

This excess liquidity was not captured by the banks via loans to consumers and enterprises as initially expected as bank lending inched up 6.7% year on year that same month, the slowest pace in more than a decade or since the 5% growth in March 2010.

The latest results of the central bank’s Senior Bank Loan Officers’ Survey showed that amid the pandemic, majority of respondent banks imposed tighter lending standards for both enterprises and households during the second quarter, snapping 44 consecutive quarters of broadly unchanged credit standards.

BDO Capital and Investment Corp. President Eduardo V. Francisco said the bank market will always be there given the economy being a “bank-centric market” and that majority of the country’s financial resources are in banks.

EQUITIES
Despite the uncertainties, the equities market “continues to be a viable venue” for fundraising activities, Mr. Monzon said.

Most companies have delayed their initial public offering (IPO) plans this year as the market volatility remains high, with some notable exceptions. Among the notable deals in the second quarter include the P1.6-billion IPO of grocery operator MerryMart Consumer Corp. on June 15, of which the offering was twice oversubscribed. That deal saw the PNB Capital and Investment Corp. as the sole issue manager, lead underwriter and sole bookrunner for the offering.

Another example of a successful listing was that of Altus Property Ventures, Inc., which entered the PSE by way of introduction on June 26. With an initial listing price of P10.10 per share, Altus’ stock price went up to as high as P240 per share before closing at P18.50 apiece on June 26. For this transaction, First Metro was tapped as financial adviser.

Then there was also the IPO of Ayala Land, Inc.’s AREIT, Inc. — the country’s first real estate investment trust (REIT) offering. Despite tumbling in its market debut last Aug. 13, it saw a twice oversubscription by the time it ended the offer period on Aug. 3.

AREIT had tapped BPI Capital Corp. as sole global coordinator and joint bookrunner for the offering. UBS AG Singapore Branch was sole international bookrunner for the international tranche, while BPI Capital, PNB Capital and Investment Corp., and SB Capital Investment Corp. were underwriters for the domestic tranche.

PSE’s Mr. Monzon noted a number of activities the local bourse have lined up for this year such as the planned P35.92-billion IPO for fiber internet provider Converge ICT Solutions, Inc. The offering, which is targeted to begin on Oct. 13 until Oct. 19 with listing on the main board of the PSE on Oct. 26, is set to be the largest public offering in the history of the Exchange since the P28.12-billion IPO of Robinsons Retail Holdings, Inc. in 2013.

The Converge IPO had BPI Capital Corp. as the sole local coordinator, joint local underwriter and joint bookrunners, while BDO Capital & Investment Corp. will be the joint local underwriter and joint bookrunner.

“This year’s pipeline also includes AC Energy Philippines, Inc.’s stock rights offering of up to P5.38 billion and PH Resorts Group Holdings, Inc.’s estimated follow-on offering valued at P1.13 billion,” Mr. Monzon said.

In the first half of 2020, the PSE said it raised a total capital of P20.83 billion, coming from one IPO, one follow-on offering, one stock rights offering and two private placements.

The PSE had originally set a capital-raising target of P150 billion for this year, up more than 50% from the P95.22 billion capital it raised in 2019. In an interview with ANC last June, Mr. Monzon said the PSE has lowered this target to P100 billion.

BDO Capital’s Mr. Francisco also noted private equity as another funding option.

“Local conglomerates… remain on the lookout for acquisitions to buy in companies needing more capital for expansion or if there is a good fit,” he said.

DEBT MARKET
Besides bank financing, corporates can also tap the less-volatile debt capital market to augment their financing needs.

As of end-August, a total 24 corporate debt listings brought year-to-date amount to P295.03 billion, bringing the total tradable corporate debt instruments to P1.48 trillion issued by 55 companies, composed of 200 securities, data from Philippine Dealing & Exchange Corp. showed.

For BPI Capital Corp. President Rhoda A. Huang, tapping the debt market “continues to be a viable option” for local firms.

“Since the lifting of the [modified enhanced community quarantine] last June, BPI Capital has completed five Peso bond deals and three US Dollar bond deals. However, we have advised issuers that investors continue to require higher-risk premiums amid relatively low benchmark rates given uncertainties arising from the pandemic,” Ms. Huang said.

Ms. Huang said BPI Capital has been encouraging Philippine issuers to consider longer-dated dollar bonds as well as alternative structures such as green, social, and sustainable bonds.

An example of these bonds was the Bank of the Philippine Islands’ (BPI) so-called COVID Action Response bonds, in which proceeds will go towards supporting eligible micro, small, and medium enterprises. BPI Capital served as the sole selling agent for the bonds while The Hongkong and Shanghai Banking Corp. (HSBC) was a participating selling agent. BPI Capital and HSBC were the lead arrangers for the issue.

Moreover, auctions on the Treasury bills and bonds saw these papers were 3.6 and 2.7 times oversubscribed, respectively. Similar robust demand was observed in the secondary market with domestic yields moving lower by an average of 186.7 basis points compared to first-quarter levels, according to the PHP Bloomberg Valuation Service Reference Rates published on the Philippine Dealing System’s website.

Market appetite was also observed in the sales of five-year retail Treasury bonds (RTBs). On Aug. 7, the Treasury ended the three-week public offer for the RTBs after it raised a record P516.3 billion, exceeding the P310 billion in three-year retail bonds sold in February.

State-run lenders Land Bank of the Philippines (LANDBANK) and the Development Bank of the Philippines (DBP) are the joint lead issue managers for the transaction. Other joint issue managers were BDO Capital, BPI Capital, China Bank Capital Corp., First Metro, PNB Capital, RCBC Capital Corp., SB Capital, and UnionBank of the Philippines, Inc.

OUTLOOK
Despite challenges surrounding the capital markets, market players maintain that there would still be room for capital-raising activities this year.

“BPI Capital does not foresee a significant drop in capital-raising transactions as companies continue to seek alternative funding sources for working capital requirements, capital expenditures, and refinancing transactions,” BPI Capital’s Ms. Huang said.

Even so, Ms. Huang said they might be a significant shift in the type of capital-raising transactions for the rest of the year.

“We anticipate more preference for debt and/or hybrid debt-type transactions as compared to 2019 when we had more deals in the project finance space. This will in turn affect the revenue source of the Bank as we continue to target higher revenues,” she said.

BDO Capital’s Mr. Francisco said there will still be bonds and loans but that it would be used more for refinancing.

“As rates are historically low, corporates will try to lock in these low rates and refinance. This is also why we are seeing an upsurge in US Dollar issuances as the coupon rates are attractive to Philippine companies who can hedge or have a US Dollar revenue source,” he said.

For SB Capital: “Any shifting environment would always see investors instantly gravitate towards safe haven instruments, followed by a gradual opening up of risk appetites.”

Still, SB Capital noted the single largest determinant to financial markets today to be the uncertainty, which “distorts pricing, business models, and appetites.”

“[A]n effective vaccine would reimagine the current landscape, removing the need to price in, and account for, mass uncertainty,” it said.

First Metro’s Mr. Dumlao said that aside from the trajectory of the virus infection, other factors that would influence appetite for capital raising include the policy response of governments to the health and economic crisis, potential credit rating downgrades for both sovereign and corporates, and the US elections and how it will shape US-China relations.