| Joseph Estrada | ||||||
This one’s a tough one.
The issuer: the Philippines government; the deal size: possibly $1 billion; the details: the bonds are convertible into shares in San Miguel Corporation; the catch: ownership of the shares, part of the Marcos booty, is still being argued through the courts.
The bonds look like a tough sell, but the Philippines Department of Finance is lining up a shortlist of investment banks tough enough to take on the job.
So far CSFB, Goldman Sachs, ING Barings, JP Morgan, Lehman Brothers and Salomon Smith Barney have been named as possible candidates for the underwriting mandate. The government may chose to hire any of them or all six.
The plan is still in its early stages admits a department official, adding that a decision is expected early this year. No amount has been officially decided, or term sheet drawn up, he says.
According to local reports, the government wants to raise the funds for a special rehabilitation fund for the coconut industry, one of the mainstays of the country’s economy. The aim is to finance replanting and farm subsidies in the wake of a massive drop in copra prices.
At the same time the bond would present a useful way of disposing of shares in San Miguel, the nation’s largest beer producer. The shares were seized in 1986 amid allegations that they were purchased with money raised from a levy of coconut farmers misappropriated by former president Ferdinand Marcos and his cronies.
The dispute over the ownership of the shares may rumble through the courts for another three to five years, although one suggestion is that the bond would enable the government to raise cash without awaiting the outcome of the judicial process.
With president Joseph Estrada facing mounting political pressure, and the peso weakening dramatically, Philippines paper would be a tough call even without the San Miguel ownership issue. Investment banks are putting on a brave face.
“There are structural things than can make it more attractive than it otherwise would be,” suggests one banker, adding: “Spreads on Philippines sovereign paper are relatively wide. I wouldn’t want to characterize it as junk.”
Another banker says: “What’s been floating around is that ownership of the shares is still the big issue. The thought process tells you that if the share issue is still unresolved how can you make the sale attractive?”
He hints that the Department of Finance is working on “internal clearance” for some method of giving added value to the deal, but added: “If you look at the universe of Philippine stocks, probably one of the top two would be San Miguel, so the underlying asset is attractive. If they can come up with a solution [to the ownership problem] it should be a workable deal.”
By mid-December the government had not got as far as making decisions on the nitty gritty of the deal, and the six banks chasing the mandate were playing their cards close to their chest in terms of the solutions they were proposing to enhance the deal.
“Everything in the Philippines from a traditional point of view – even plain vanilla equity – is going to be difficult,” says the first banker, citing the long list of problems facing the country.
“Add to that the relatively low weighting by any kind of global emerging market index, and you have a very low natural investor base,” he says.
“Getting them over their concerns with the macro situation and the overall low level of liquidity and size of the Philippines market will be a bit of a challenge but tougher deals have been done and this one certainly has a fighting chance if structured right,” he says.
The resolution of the ownership of the San Miguel shares is certainly a key point. “I think there are ways of giving investors comfort that they will be protected no matter how the issue is resolved. We have examined that issue and tried to create a product that compensates investors for taking the risk,” he says, without saying how that might be done.
On the face of it, some kind of additional payment, or alternative shares, might be appropriate.
Given the importance of devising a structure to sell the issue, the six banks shortlisted are understandably cagey about their proposals.
“We spent a lot of time thinking about how to do this. I am already a bit concerned that the Philippines is a bit of a leaky ship in terms of information,” says one banker.
“This is kind of an interesting situation and it is not going to be down to league tables. It seems this will be down to who has put the most brainpower into figuring out what is the most attractive to investors,” he says.
“The spreads are such that a Philippine sovereign is not really do-able,” says another banker. “You have to assume that if the best structure a bank can come up with depends on this being sovereign then this deal is probably not going to get off the ground. You have got to come at it from the other end and try to work to avoid the sovereign thing, because if you don’t, in the absence of a significant improvement in the conditions, investors are just not going to buy it.”
So who is likely to buy this paper?
“Predominantly investors who still invest in Philippines equity – country-dedicated funds, which are mostly based in Asia,” says one banker. The paper will also be targeted at European, and to a lesser extent US investors.
