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Saturday, 22 September 2018

Philippines Capital Markets Deal

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Philippine conglomerate Ayala took advantage of investors’ growing hunt for yield, as well as its own rarity value as an issuer, to lock in long-term, flexible funding with the country’s first fixed-for-life perpetual bond.

The US$400m deal drew strong demand from both offshore investors and domestic institutions flush with dollar liquidity, closing multiple times subscribed with final orders of over US$2.5bn.

In fact, demand was so hot that Ayala decided to accelerate its timeline and launch the transaction on the third day of a three-day roadshow, while still taking meetings with investors.

The September deal was Ayala’s first offshore visit since 2003, which meant that there was pent-up demand from investors but also meant investors had no secondary curve to provide a pricing reference, creating a challenge for the bookrunners in finding the right level.

That meant that the Philippine sovereign was the main reference, with an additional spread applied for the credit and the perpetual structure. In the end, Ayala’s issue priced well inside the fair value estimate of 5.25%–5.50%, printing at par to yield 5.125%. That was a full 50bp inside initial price guidance, and showed investors’ determination to gain exposure to the name. Even at that level, the bonds still traded up in the secondary market.

Even without a credit rating, investors were happy to take exposure to the structure, which offers no protection from rising interest rates with no reset feature or coupon step-up throughout the life of the bond. Ayala did not issue the perp to benefit from equity accounting treatment, as some other Asian issuers have done, and in fact the notes are counted as debt, widening the investor base that could buy them and allowing them to price more tightly. Ayala maintains a prudent amount of leverage and could afford to take on extra debt.

Proceeds will be used to refinance the issuer’s maturing US dollar obligations and to fund investments, but the issue also helped Ayala to diversify its sources of funding and gave it flexibility over the maturity, which could be important if it makes acquisitions. The offering also helped Ayala to lock in a low borrowing cost even though it was clear that rates were heading up in the near future.

There had been a few fixed-for-life issues from select issuers in Greater China, but international investors were keen to diversify, and the fact that Ayala’s deal was the first corporate offshore dollar bond issuance of the year from the Philippines also counted in its favour.

HSBC was sole global coordinator for Ayala’s issue. It was also joint bookrunner with Deutsche Bank and JP Morgan. BPI Capital and China Bank Capital were domestic lead managers.

To see the digital version of this report, please click here

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