More capital-raising activities expected in 2018

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CAPITAL RAISING in the Philippines is seen to increase this year as companies continue to tap investment banks in building their war chests.

Capital raising, which includes equity and fixed-income issuances, amounted to P724 billion in 2017, up from the P382 billion raised in 2016. Almost 80% or P586 billion were from fixed-income issues and P138 billion were from equity issues. Meanwhile, four new companies debuted on the local bourse last year -— Wilcon Depot, Inc., Eagle Cement Corp., Cebu Landmasters, Inc. and Chelsea Logistics Holdings Corp.

And this amount is seen to increase this year.

For one, First Metro Investment Corp. (FMIC) expects capital raising to accelerate this year by 29% to P934 billion from 2017’s P724 billion. Of the almost P1 trillion to be raised this year, P687 billion would come from fixed-income issues while P247 billion is expected to originate from equity issues, Head of Investment Banking Group Jose Pacifico E. Marcelo said in a briefing last month.

The year 2017 was a good year for China Banking Corp. (China Bank) with its investment house subsidiary China Bank Capital Corp. (CBCC) posting a 25% earnings growth from increased participation in capital market deals.

“China Bank Capital saw a significant spike in the number and size of deals that we handled or participated in,” said Ryan Martin L. Tapia, president of CBCC. “We were particularly very active in the capital markets space, where we continue to be one of the top domestic bond houses, and where we expanded our presence in public equity offerings,” he added.

CBCC’s net income stood at P195 million in the January to September period, China Bank’s disclosure to the stock exchange last Nov. 16 showed. It was higher than the P95 million in the same period in 2016. CBCC’s total assets reached P1.501 billion, up from the P620 million in 2016’s nine-month period.

Meanwhile, BDO Capital & Investment Corp. (BDO Capital) was one of the largest contributors of income among BDO Unibank, Inc.’s (BDO) subsidiaries according to BDO Capital President Eduardo V. Francisco.

BDO’s investment banking segment’s net profit for the January-September period reached P687 million, up from the P396 million in 2016’s comparable period, BDO’s disclosure to the stock exchange as of September 2017 showed. BDO Group’s January-September net profit stood at P20.386 billion, up from 2016’s P19.321 billion.

FMIC, along with CBCC, and BDO Capital had been active in capital-raising activities in the last quarter of 2017.

Among the notable deals in the fourth quarter include the Vista Land and Lifescapes, Inc.’s $350-million seven-year bonds offer with the final order book totaling $1.7 billion. That deal saw the CBCC as the domestic manager while HSBC (Philippines) Ltd., and DBS Bank Ltd. were tapped as joint lead managers and bookrunners.

Meanwhile, BDO Capital, FMIC, and CBCC were among the five firms along with BPI Capital Corp. and SB Capital Investment Corp. that acted as joint issue managers for the government’s offer of five-year retail Treasury bonds (RTBs) last November. In the RTB sale, the government raised P255.4 billion — with P125.4 billion worth of five-year RTBs issued during the Nov. 20-27 offer period in addition to the P130 billion issued in the auction on the first day. These RTBs carry a 4.625% coupon rate and will mature in 2022.

BDO Capital and CBCC were also tapped by canned fruit manufacturer Del Monte Pacific Limited (DMPL) as joint lead underwriters for its Series A-2 preferred shares offer last year, raising $100 million from the process which includes $20 million from the oversubscribed shares. BDO Capital was the sole issue manager and sole bookrunner.

Asked on last year’s performance, BDO Capital’s Mr. Francisco noted the intensifying competition among investment banks, resulting in shrinking fees.

“That means we have to work on more deals to make the same amount of revenue than previous years,” he said.

Mr. Francisco added that there were “less project finance deals in general” as the country’s power supply is deemed sufficient for the next few years given that most of the large power plant projects have already been completed and given the government’s focus on Official Development Assistance as the main mode of financing projects.

“The volume of capital market issues has gone up in 2017 due to the increase in Retail Treasury Bond Issues which reached an all-time high of P437 billion in two tranches,” said FMIC President Rabboni Francis B. Arjonillo.

“With minimal fees from government issues, total fees for debt capital markets remained the same for 2017. Mergers and Acquisitions, on the other hand, had a lower volume for 2017, consequently giving lower fees. However, First Metro benefitted from a few deals that provided hefty fees in this space. The Wilcon IPO (initial public offering) lead the way for all IPOs introduced by the market in 2017 and contributed significantly to First Metro’s bottom line,” he added.

Nevertheless, 2018 should be a good year for capital raising with investment banks expressing optimism due to expectations of more bond sales and IPOs.

“We see several big IPOs this year,” BDO Capital’s Mr. Francisco said, citing the planned P16-billion IPO of Del Monte Philippines, Inc. this year as a basis for his upbeat outlook.

BDO Capital has been tapped as issue manager, sole global coordinator, and sole bookrunner in the Del Monte IPO, which is set to offer a total of 559.464 million shares to the public or about 20% of its outstanding shares according to a disclosure to the stock exchange earlier this month. This would be the country’s largest IPO in 15 months and Southeast Asia’s largest for a food and beverage firm in nearly six years, according to data by Reuters.

For CBCC’s Mr. Tapia, there would be “more than a handful of IPOs” this year as well as an increase in follow-on offerings.

“We expect conglomerates to continue to be active given the spate of expansion and new projects being considered. These companies would be more cautious about their SBLs [single borrower’s limit] with their lending institutions. In their effort to preserve banking lines, these corporates will turn to debt and equity capital markets to augment their funding requirements,” he said.

For FMIC’s Mr. Arjonillo: “The overall fixed income issues are expected to increase by 17% for 2018 where a 68% increase in total corporate bond issues (P126 billion to P212 billion) is anticipated.”

“Additionally, a 79% increase in common equity issues is expected for 2018 (P138 billion to P247 billion).   All things equal, we see a more robust market issuance in 2018, in both debt and equities markets,” he added.

For BDO Capital’s Mr. Francisco: “There will be several more big-ticket items this year that we expect but we will wait for the client to announce this at due course. Bond issuances will also continue as the clients want to tap the markets in ahead of the several Fed [Federal Reserve] increases expected this year.”

Besides the Del Monte IPO, another notable deal this year would be San Miguel Corp.’s P30-billion fixed rate bond issuance this March of which CBCC, FMIC, and BDO Capital were among the seven banks tapped to arrange the offer.

Meanwhile, BDO Capital and FMIC were tapped by the Philippine Stock Exchange (PSE) to arrange its P3.16-billion stock rights issuance of which the funds raised will be used in the acquisition of the Philippine Dealing System Holdings Corp., the country’s fixed-income exchange operator. Originally planned this month, the PSE pushed back the planned stock rights offering to March in light of the volatility in global markets.

“We will definitely see more bond sales this year as more issuers will utilize their shelf registration, preserve banking lines, diversify their funding source, and widen their retail investor base,” CBCC’s Mr. Tapia said.

“Furthermore, we expect to see more maiden fixed-income issuers as companies look to expand their investor base and diversify their funding sources from just the usual bank loans. Given these trends, we expect a large volume of fixed-income issuances from repeat and maiden issuers alike,” he added.

Asked on the possible impact of the newly implemented Tax Reform for Acceleration and Inclusion (TRAIN) law on their businesses, CBCC’s Mr. Tapia said: “From our perspective, the DST [documentary stamps taxes] rate hike is the most relevant in terms of deal flow, as this increases the cost of doing debt or equity issuances.”

“That said, we do not foresee any material impact on our business as corporates will still have funding requirements to bridge,” he added.

For FMIC’s Mr. Arjonillo: “[T]he TRAIN law will affect First Metro’s business insofar as stock trading and funds generation activities are concerned, due to higher stock transaction tax and DST of 20% and 0.125%, respectively. But this is just in the short-term and may be short-lived.”

“For as long as the conditions exist to increase the absorptive capacity of the economy, i.e., infrastructure projects remain on track, a global economic recovery continuing that will spur our exports, domestic consumption strong, manufacturing activity growing, imports are mostly in capital goods, and corporate profits showing an upward trajectory — all these evidenced by   robust macroeconomic numbers — the additional taxes will serve as a catalyst, rather than as a deterrent, to economic growth,” he added. — Christine Joyce S. Castañeda