• A P4.5-T bond market emerges to offer vastly untapped potential


    Last of three parts

    THE Philippine bond market, despite having outsized the country’s economy in gross domestic product (GDP) terms, remains a large reservoir of financial resource largely untapped by local companies, which have traditionally leaned on banks and the equity market for their funding needs.

    Government and corporate bond issues alike, are in some ways completely deserving of the judgment that headlined Part Two of this special report on Wednesday: ‘A surprise good buy.’

    Analysts and government financial managers are unanimous in their assessments that the Philippine bond market is a significant positive contribution to the economy as a whole, and that maximizing its advantages should be a key priority.

    To put that significance in perspective, the present value of the Philippine bond market as measured by outstanding issues is about P4.5 trillion, of which about P3.8 trillion are government securities. Both figures are at least by one measure larger than the entire Philippine economy – gross domestic product (GDP) at current prices stands at just over P3.125 trillion according to the latest official data released Thursday.

    To get a sense of where the local bond market is headed, and where stakeholders would like it go, The Manila Times interviewed a cross-section of market observers, and discovered a picture that is remarkably consistent from every angle: A market that, while already successful by just about any objective measure, can and should be expanded beyond its present limits.

    Upgrading and streamlining regulation, tax reforms, and implementing new systems and products to improve investor knowledge of the market and the market’s accessibility to investors are common recommendations offered by institutional and private sector analysts, bond issuers, investment managers, and monetary authorities alike.

    Corporate bonds key to market growth
    If there is something about the Phil-ippine bond market that could be described as “an area of concern,” it is the persistent imbalance in favor of government securities despite the rapid growth of corporate issues in recent years. Bangko Sentral ng Pilipinas (BSP) Deputy Governor Diwa Guinigundo pointed out, however, that corporate bonds have outpaced growth in the overall market on a percentage basis over the last 10 years.

    “It is worth noting that the issuance of corporate securities has registered rapid growth over the years from P35 billion (1.1 percent market share) at end-June 2004 to P673 billion (15.0 percent) at end-June 2014,” Guinigundo said.

    That represents almost a 20-fold expansion of the corporate bond sector, whereas during the same period, the size of the market overall in terms of outstanding issues grew by about 2.4 times, from P1.1 trillion in 2004 to P4.5 trillion.

    “However,” Guinigundo continued, “the local debt securities market has remained dominated by government securities. Despite the significant increase in the past years, corporate fixed income securities listed and traded on PDEx have lower trading volumes and lower turnover ratios compared to government securities.”

    In Guinigundo’s view, factors that may contribute to this are the relatively smaller average issue size of corporate issuances, skewed distribution toward qualified institutional investors that tend to be buy-and-hold investors, limited market-making activities, and the lack of alternative investment outlets for investors.

    Eduardo Francisco, president of the Investment Banking Group at BDO Capital and Investment Corp. explained, “Banks have been funding most of the needs of our corporates.

    In developed capital markets, bond markets are even much larger as a percentage of total financial resources.” As was pointed out in Part One of this special report on Monday, the healthy levels of liquidity and availability of credit in the banking system, as well as the relative ease with which corporate borrowers have been able to tap equity financing have in some tangible ways been an obstacle to growth of the corporate bond market.

    But Francisco, whose BDO Capital has overseen recent noteworthy bond issuances by GT Capital Holdings (P12 billion), SM Prime (P25 billion fixed-rate bond), and Century Properties Group (P3 billion), is generally pleased with the overall market trend so far.

    “Despite the banks’ liquidity, the bond issuances have grown a lot,” he noted. “I think they [corporate borrowers]are utilizing it just right.” He suggested that the quality of the debt issues that are being offered is an important feature of the current market. “But please note that all the corporate issuances so far [have been rated as]‘Aa’ and better,” he added. “So what we’re seeing is all really the best of the best.”

    From the perspective of a bond issuer, there are few signs the market will cool any time soon.

    * * *

    “The Philippine bond market is still in record growth, in terms of volume of issuances,” said GT Capital Holdings Inc. Chief Financial Officer Francisco Suarez. “As of the seven months this year, the volume of issuances has already exceeded the record in 2013, but there are still pending bond issues, and we expect it go up in the latter part of the year.”

    * * *

    As to GT Capital’s own experience in the market, “So far it’s good,” Suarez said. “We raised P10B in 2013, and the P15B recently issued. We’re oversubscribed, actually.”

    Globe Telecom’s Head of Corporate Communications, Yoly Crisanto, agreed with Suarez’ assessment. “Growth in the local capital markets has been tremendous over the past few years, enabling corporates such as Globe ??to gain ?valuable access to a much wider investor base, and giving investors more diversified choices for investments,” she said. “We would certainly continue to support initiatives of the regulatory agencies that would continue this growth.”

    Despite Globe’s positive impression of the market’s reach, what is widely seen as the key obstacle to maximizing the market’s potential in corporate securities is its current limitation to a rather narrow class of investors.

    “To attract more investors to the bond market it has to be made accessible,” said Justino Calaycay of Accord Capital Equities Corp. “At present, access to the bond market is limited to the PDEx and the denominations are quite large for the average investor. If bonds can be cut down to retail sizes and be made available through a platform similar to that of stocks, rather than having to indirectly invest through established funds, that could boost interest and participation in the debt market.”

    Calaycay recognized, however, that the relative youth of the local capital markets means expanding the investor base is not likely to happen overnight. “But of course, this will take a long process of educating the public on this type of investment – something which the stock market is still struggling with, albeit admittedly having made significant headway,” he added.

    Sustaining momentum
    The recent increase in the holdings of the Philippine Stock Exchange Corp. (PSE) in the PDS Group that manages the PDEx bond trading platform was the first step in the eventual integration of the country’s debt and equities markets, a move that is warmly welcomed by the BSP.

    “The BSP supports the proposed merger of the PSE and PDEx, which will unify the exchange platforms of the country’s equities and fixed income markets,” BSP Deputy Governor Guinigundo said. “Such unification will address gaps in the financial market infrastructure in the Philippines, and will greatly help in increasing the efficiency and contributing to the overall deepening of capital markets in the country.”

    One important aspect of the proposed merger is that it will bring Philippine capital markets in line with other major regional markets in terms of integration.

    According to information provided by the BSP, Australia, Malaysia, Singapore, Thailand, and even Indonesia all have unified securities and equities markets, while Vietnam only has over-the-counter trade for securities.

    “In the context of the Asean integration, the merger can expedite integration and ensure the competitiveness of Philippine financial markets in the region,” Guinigundo said. “And in terms of governance, a merged exchange will also increase the efficiency of regulation of the capital market as it will only require a unified set of rules and surveillance.”

    But to sustain the positive momentum of the market, the BSP suggests a couple of key initiatives should be pursued. “The tax environment of debt issues is a major cause for the segmentation of the market,” Guinigundo explained. “In particular, the present organized market has been limited to that segment of the community that is subjected to a final withholding tax on interest payments. Meanwhile, the tax-exempt segment of the market has been left in the periphery of the organized market. This market segmentation has kept a large pool of securities liquidity away from the organized market.”

    The BSP is also working toward the development of a repo (repurchase) market, something that is noted by many analysts and market stakeholders as being perhaps “the next big step” the local bond market should take. In repo transactions, securities are used as collateral for short-term borrowing; they are a common feature in established securities markets, but present a number of management and regulatory challenges.

    “The General Collateral Financing (GCF) model is being considered where a type of repurchase agreement (repo) is executed without the designation of specific securities as collateral until near the end of the trading day,” Guinigundo said, explaining the initiative currently being pursued by the BSP in partnership with the banking industry.

    The safety net of the model is the use of a Tri-Party Agent, which will handle all the trade processing such as collateral selection, payment and settlement, custody and management during the life of the transaction. “This provides valuable benefits to both the participants and the overall market by reducing transaction costs, enhancing liquidity, and facilitating the efficient use of collateral or decreasing the complexity of handling securities and fund transfers for repo agreements,” Guinigundo added.

    How soon this development might see the light of day, however, has not yet been determined, and Guinigundo suggested there remained much to be done. “Adopting the GCF model has implications on regulations governing custodianship, clearing banks and PhilPass membership to accommodate non-bank members,” he explained. “This requires accelerating the establishment of an acceptable structure and governing standards for a functional repo market.”

    For now, expectations of the market’s trajectory are all upward despite its various limitations, although observers are mindful of the potential impact of higher interest rates. GT Capital’s Suarez said, “We think bond issuances will continue. If interest rates and liquidity continue to be favorable, then I think more companies will be putting up bonds to raise funds for expansion.”

    “If the general expectations are correct that interest rates will soon rise, we may see a pick-up is bond issuances and capital raising through the debt market as firms attempt to lock in lower rates,” Accord Capital’s Calaycay said. “However, one thing that could keep them from doing so is the debates on whether the changes in interest rate levels will be substantial and sustained.”

    In terms of the market for government securities, Calaycay sees the current trend holding steady. “The government on the other hand has been able to keep a good fiscal balance therefore less pressure on the debt market,” he added. “This should temper demand side shifts in the curve.”



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