After a flurry of activity in 2015, including a dual-listing initial public offerings (IPO), a key stock returning to the exchange after suspension and the writing of a series of major reforms, Papua New Guinea’s capital markets are rebounding. The benchmark stock index started to climb again in 2016 and continued to do so through early 2017, following years of decline since hitting record highs in 2010.
The market remains sound, well managed and prepared for the economic upturn expected with the next large liquefied natural gas (LNG) investment. Work continues in the background on improvements and upgrades, while expected reforms, which include changes to legislation, structures and governance, should be in place by the end of 2017. Incremental refinements in the bond market, led by the central bank, are ongoing, as are the bank’s efforts to get the attention of international custodians. Significantly, international financial institutions are taking a great interest in the country, with big names involved in roadshows, marketing IPOs and raising debt. Not all the activities have resulted in transactions, but the participation of major players is seen as a sign that PNG may be turning the corner in the eyes of the global investment community. In anticipation of the next LNG project, they are building relationships and laying the groundwork for the future. Despite these advancements, challenges remain. Volumes on the exchange are low, demand from international investors is weak and delays in implementing reforms weigh on sentiment. The markets have also been buffeted by some disappointments – one company de-listed, another is in administration and a few much-anticipated international transactions failed to materialise. Still, the system is structurally sound.
The Port Moresby Stock Exchange (POMSoX) has been up and running since 1999, and is underpinned by sound law and good infrastructure. The Securities Act 1997, the Securities Regulations 1999 and the Takeovers Code 1998 govern the sector, while the Securities Commission of PNG (SCPNG) is the regulator. The Takeovers Code was amended in 2013 to include a national-interest test, which allows the SCPNG to block an acquisition if it believes the country will be harmed by the transaction. The exchange is modern, stable and fully automated, utilising the Port Moresby Stock Exchange Electronic Trading System and clearing at T+3, the global standard. Market infrastructure and the listing rules are based on Australian models.
“Compliance is robust,” Richard Borysiewicz, head of BSP Capital and Corporate Advisory, told OBG. “The system is robust.” In recent years, the market has experienced some significant positive activity. In 2015 Kina Securities, one of the two licensed brokers on the stock exchange, listed on the Australian Stock Exchange (ASX) and the POMSoX after selling 97m shares in a public offering. Kina Asset Management was already listed in Port Moresby.
In part, the new funds were used by the group to buy Maybank PNG. The listing was met with considerable enthusiasm and generated a good deal of interest overseas, mainly because of the potential of the PNG economy and Kina’s strategy to become a major financial services provider in the country. The shares jumped at the open, but have since declined to trade slightly under the offer price. Meanwhile, PNG Air has returned after a year off the market. Originally listed in 2008, the company was suspended from July 2014 to July 2015 as it went through a major restructuring. Known previously as Airlines of PNG (with CGA as its ticker), it had been performing poorly and faced some safety issues. In returning to trade, the firm was rebranded, with a new name and a new livery, recapitalised and its fleet built up with a major order of new ATR-72s. Another sign of health came in 2016, when ExxonMobil acquired all the shares of InterOil in a transaction worth $2.5bn. The deal was completed in early 2017. Until 2005 InterOil had been listed on the ASX.
Some indicators suggest that the market is turning the corner. The indexes have been doing well after many years of decline. The Kina Securities Index, which measures all PNG-related shares, reached 5095.52 in May 2017, and the Kina Securities Home Index, which measures those shares trading domestically or mainly focused on activities in PNG, hit 11,066.69. The indexes were up by about 5.9% and 4.1%, respectively, from the end of 2016, having ended that year at 4812.98 and 10,628.44, respectively, up 40.8% and 10.7% since the low point near the end of 2015. However, the benchmarks are still short of their records, of about 7000 and 14,000, though they have recovered considerably.
With confidence in the market being restored, brokers are starting to notice new opportunities. Unmet demand may exist in places like the Highlands, for example, where some people have significant cash reserves that they wish to invest. The brokers note, however, that to tap that market a physical presence would be needed. “There is a lot of interest up there,” Gheno Minia, head of equities at BSP Capital, told OBG. “It is a good market for a new entrant with a low cost structure. Lots of opportunities, but you have to be out there.”
More generally, the international community has demonstrated an increased interest in PNG. In 2016 Credit Suisse arranged a $200m loan for the country, with the size rising as it expands the syndicate. As of early 2017, the total had grown to $310m, with the Industrial and Commercial Bank of China and European banks joining the group. The loan duration is five years and the interest rate is 575 basis points above Libor, in line with pricing for other emerging market issuers, such as Mongolia, Reuters reports. Market participants see this loan as a positive sign, as it indicates growing international acceptance of the country and a desire on the part of major institutions to get involved in the market.
Despite the positive signs, some worrying long-term trends remain. In recent years, a number of companies have left the market. To be sure, some of the exits have been due to changes in corporate structure and not necessarily a reflection on the market. Cue Energy de-listed in 2015, having gone public on the POMSoX in 2000. It also de-listed from the New Zealand Stock Exchange and is now traded solely on the ASX. The exploration and production firm, currently active in Australia, New Zealand and Indonesia, sold its PNG assets to Kumul Petroleum in 2014. New Britain Palm Oil was de-listed in 2015 after being acquired by Sime Darby. It had been on the board since 2001.
Others have exited the market after concluding that remaining on the board was not a worthwhile proposition for their particular business requirements. Marengo Mining, which has been on the exchange since 2006, left in 2015. The move was in part connected to a larger corporate refocus in which Marengo re-domiciled and moved trading from Australia to Canada in 2013 (it is now Era Resources). Dropping the Port Moresby listing was also related to the cost of the firm’s presence in PNG. Marengo noted that being on the POMSoX was a heavy compliance burden, considering that only about 5% of its shares were listed on the exchange. The company is developing the Yandera Project, a copper and gold mine in Madang Province.
New Guinea Energy (NGE), which had been on POMSoX since 2008, de-listed from the exchange in June 2016. It said that the low volume of trading did not justify the cost of the listing. Only about PGK30,000 ($9500) worth of its shares were on POMSoX, and it was costing the company more than that per year to maintain the listing. NGE has two oil prospect licences in PNG and almost all its business is within the country. Shares of the Australian firm will be administered in Australia by the company’s current share registrar. The stock can still be bought or sold via brokers in Port Moresby or Australia.
No new companies joined the exchange during 2016, nor were there any listings as of mid-2017. A total of 15 companies are on the POMSoX. Of those, five are in mining and exploration (Newcrest Mining, Highland Pacific, Niuminco Group, Indochine and Coppermoly), two in oil and gas (Kina Petroleum and Oil Search), three in banking or finance, one in aviation, and two in industry or agriculture. Steamships Trading Company was the first to list (it has been on the ASX since 1924). In addition to the formal de-listings, Indochine has been in voluntary administration since 2015.
Volume has been extremely low, with some shares not trading at all in months, or even years. Most companies have no bids, no offers or both. Shares that do have buyers and sellers are usually illiquid due to wide disparities between the prices. In mid-May 2017, for example, Kina Petroleum shares were being bid at PGK0.20 ($0.06) and offered at PGK1 ($0.32), with the most recent trade at PGK0.44 ($0.13). PNG Air’s bid/offer was PGK0.10 ($0.03) and PGK0.15 ($0.05). The only shares where buyers and sellers were close were BSP, Oil Search and Highland Pacific.
A number of major international transactions have been in the works by local firms, but as of mid-2017 none had been completed. Bank South Pacific (BSP) has been planning to list on the ASX, a deal would result in about A$1bn ($752m) of shares being sold, according to the Australian press. Large international institutions have been involved, with UBS working with Morgan Stanley on the offering. In early April 2017, BSP said it was putting the share sale on hold, but was still considering a secondary listing – just not a public offering. Press reports indicate that shareholders disagreed on the structure of the transaction, with the sticking point centred around getting shareholders to sign an escrow agreement. The reports added that investors expressed concerned about the PNG election, which subsequently took place in June/July 2017, as well as the low level of reserves at the central bank.
Moni Plus is working on a Singapore listing and has faced some difficulty. It hopes to enter the Asian exchange via a reverse takeover, in which a Singapore entity buys Moni Plus with its own shares, leaving the shareholders of the PNG firm as the majority owners of the publicly listed firm. The deal has been valued at $168m. Due to heightened concern on the part of regulators in Singapore about Malaysia’s 1MBD development fund – following allegations of systematic money laundering, embezzlement and fraud in 10 countries – the regulatory process for Moni Plus has taken longer than expected. Authorities in Singapore are approaching all foreign entities with extra caution and their highly conservative approach is affecting even the strongest of issuers.
On the debt side, 2016 was a year of considerable activity, but little in the way of results. The Bank of PNG hired ANZ, the Bank of China, JP Morgan and Société Générale to conduct roadshows in London, Boston and New York in 2016, in anticipation of a possible sovereign bond sale. However, the transaction did not happen as anticipated. Concerns about the bond centred on the need for a devaluation of the kina and the country’s sovereign debt ceiling. PNG’s opposition argues that the government is up against its debt limit of 35% of GDP, and said it would sue if the bond were issued. The climate was also a concern during the roadshow, with a drought and social instability hanging over any potential offering.
While the market is sound in terms of regulation and structure, concerns have been raised over the years. The need for some reform is widely recognised. While the market is automated, post trade remains an issue as shares still settle and clear manually. Even the trading system itself has been brought into question, with the central bank arguing that it is in need of an upgrade. Governance issues affect the sector’s regulation, leading to a need for restructuring. The SCPNG remains under the Investment Promotion Authority, and its powers are limited. It only licenses the stock exchange and the trustee companies, but does not license stock brokers, investment managers or underwriters. It does monitor and regulate trading on the exchange, and while POMSoX is a self-regulatory organisation, the SCPNG approves the listing and business rules of the exchange. In terms of the exchange, research suggests that the listing rules are too strict and should be relaxed to encourage more activity in the equity markets.
The latest reform involved revising the Takeovers Code and has been somewhat controversial. It is widely seen as being too vague and subjective, while some critics regard it more as a tool of economic nationalism than a useful piece of legislation for market regulators. The Takeovers Code, as amended, was used to block the acquisition of a majority stake of New Britain Palm Oil (NBPOL) by former minority shareholder Kulim, a Malaysian firm. NBPOL was then acquired by Sime Darby, also a Malaysian company, with the full approval of the government.
Mixing It Up
Of the various challenges faced in the PNG market, the structure of the stock exchange is of greatest concern to investors. At present, the exchange has just two owners, and they are also the only licensed brokers. The exchange is 62.5% owned by BSP Capital, the rest by Kina Securities, with BSP historically completing the vast majority of trades. The structure is largely a function of history and necessity rather than by design, and BSP has expressed in the past that it is open to any reasonable suggestions for a change in ownership.
Nevertheless, the potentially duopolistic nature of the market is seen as less than ideal. The central bank has recommended a liberalisation of the market and has suggested that a foreign shareholder be brought in. International ownership is seen as beneficial as it would result in the importation of technology from the partner. Prime Minister Peter O’Neill has been pushing for competition in the sector, commenting that two brokers and two owners is insufficient. He has also noted that the SCPNG does not have the power to enforce the securities laws.
In 2015 the government moved to replace the Securities Act with three laws: the Securities Commission Bill, the Capital Markets Bill and the Central Depository Bill. The legislation focuses on improving licensing, disclosure and transparency, and creating market infrastructure that meets international best practices. Importantly, the Securities Commission would become independent, with its own budget and funding. The bills passed in late 2015, but as of early 2017 had not been implemented, though they were expected to be by end-2017.
Other major reforms that have been discussed include the introduction of a new index, one that complies with international standards, as well as the creation of a super-regulator, covering all the financial markets, including insurance, banking and securities. A secondary board, with easier listing rules, has also been mentioned. Regardless of what is done with respect to the structure and the governance of the market, certain key relationships need to be built before it starts to work to its potential.
At present, no global custodian offers services for POMSoX. This is a major gap in market infrastructure as most institutional investors are unable to buy into markets without going through a recognised global custodian. A number of institutions have been approached about establishing relationships with the local brokers, but because of the current low volumes in the market none have followed through. “It is a chicken and an egg problem,” said Borysiewicz. “How do I get the volumes?”
The bond market is regarded by many as underdeveloped, with government securities traded over the counter, usually by phone. Only one debt instrument, a corporate bond issued by BSP, is traded on POMSoX. While the central bank sees no advantage in the listing of government securities, it would like to see a centralised system developed for bond market data. It has also recommended a repo market be established and has published a Master Repurchase Agreement, a daily yield curve, a code of conduct for the bond market and a website for international investors. Adding the capabilities of the Bloomberg terminal for bond trading has also been discussed and is supported by the financial community. For small investors, the Central Bank Bills Tap Facility allows exposure to government bonds.
The regulatory foundation is solid but basic, with the market governed by a number of decades-old laws: the Loans (Overseas Borrowing) Act of 1973, the T-Bills Act of 1974 and the Loans (Overseas Borrowing) Act of 1976. Responsibility for bond regulation is not clearly defined by the Securities Act, with the Bank of PNG providing most oversight. Modernising the bond market is seen as vitally important to the country and to the economy, as secondary trading and other basic reforms would attract international investors and lead to inflows. The central bank’s governor, Loi Bakani, told local press that this would help balance the financial account, which would in turn help stabilise the currency.
The capital markets of PNG have generated considerable interest. With the development of another LNG project on the horizon, major international players are committing resources to the country and becoming more involved in its international financing activities. Domestically, the need for more efficient systems, particularly on the bond side, and more evolved international relationships, especially in terms of custodian banks, is widely recognised. The relevant work is being undertaken over time. However, the market as it exists is stable and sustainable. While volumes may be low and liquidity lacking, the platform is in place and well maintained, ready for when investors return in significant numbers.
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