Domestic corporate bonds have a reputation as a small and obscure niche market, but 2014 was a breakthrough year when the market finally appeared to be finding its legs and growing into a major fundraising venue. Gross issuance through the Philippine Dealing and Exchange Corporation (PDEx) fixed-income exchange came to P192bn ($4.3bn) in 2014, up 130% from the P83.5bn ($1.9bn) issued in 2013. Outstanding issuance grew from 59 bonds issued by 21 companies worth P345bn ($7.8bn) at the end of 2013 to 88 bonds issued by 31 companies worth P470bn ($10.6bn), according to PDEx. Remarkably, this happened during a year when interest rates were expected to and did in fact rise, which reduces the market prices of bonds.
GROWTH: “2014 was a very good year. The economy has been very liquid,” Renato H Peronilla, president and CEO of PhilRatings, said. Executives involved in the market told OBG there were three factors driving the growth. The first was that conservative fiscal policy had limited government issuance. The second was that many of the major conglomerates have tapped out their ability to borrow from affiliated banks, which has been more strictly limited by Bangko Sentral ng Pilipinas (BSP), the central bank. The BSP prohibited banks from lending more than 25% of their capital to a single borrower and has been treating all related parties as a single borrower. That mainly affects conglomerates that own a bank and have used it to finance the group’s investments and business groups with large borrowing needs. Jose V Cruz, president and CEO of investment bank Amalgamated Investments, told OBG that banks are the main driver of the corporate bond market, supported by insurers and pension funds. He said that banks often lay off bonds to their trust-account customers, whose investments do not count towards the bank’s single-borrower limit. “With interest rates rising, capital gains on fixed-rate investments aren’t great anymore, but the deposit base is so strong banks don’t mind hanging on for three- to five-year maturities,” he said. The third reason for the growth is a surge in peso liquidity since 2013, resulting from a BSP decision to step back from use of special deposit accounts (SDAs), interest-paying demand deposit accounts offered to banks and other BSP-supervised financial institutions.
LIQUIDITY: SDAs were used to sterilise the BSP’s interventions in foreign exchange markets through early 2013, when strong inward financial flows would otherwise have caused rapid peso appreciation. BSP assets more than tripled between 2005 and 2012 from P1.3trn ($29.3bn) to P4trn ($90bn). The BSP’s move to ban pass-through accounts that gave broad access to SDAs released much of that liquidity from sterilisation. Over the 18 months after the BSP banned SDA pass-throughs, SDA use dropped from P1.82trn ($41bn) in May 2013 to P957bn ($21.5bn) in November 2014. Most of the released funds were shifted into commercial bank deposits and the corporate bond market.
There has also been a surge in privately placed debt securities, which are referred to as corporate notes. Some public issues are structured as long-term time deposits or short-term commercial paper, which are grouped together with bonds in issuance data. Listed issues require approval from the Securities and Exchange Commission; privately placed corporate notes do not.
Even most listed corporate bonds are not actively traded. Although trading volumes have grown rapidly from P11.1bn ($250m) in 2011 to P45.9bn ($1.03bn) in 2014, that was still only 2% of equity trading volumes on the Philippine Stock Exchange. For PDEx, corporate bond trading made up 1% of its trading volumes in debt securities in 2014, 99% of which were in Treasury issues.
Lynette V Ortiz, managing director and head of global markets in the Philippines at Standard Chartered, told OBG that most buyers are treating bonds as buy-to-maturity investments and strongly favouring the largest companies. “Buyers want the big names with sufficient disclosure and a foreign rating or a strong local rating.”
Ortiz said a more active repurchase agreement market would help liquidity and needs to develop first with Treasury issues before moving into corporate bonds.
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