In this issue
More on Drowning in Debt: BDO, Ayala Corp, San Miguel and Subprime Emerging Markets
-More on Phisix Issues Drowning in Debt: BDO, Ayala Corp and San Miguel
BDO’s USD700 million Senior Notes
Ayala Corp’s USD 400 Million Perpetual Bonds
SMC Global Power Holdings Plans to Acquire Php 35 billion of Debt
-Flattening Philippine Yield Curve Indicates Transition to Tight Money
-Drowning in Subprime Emerging Market Debt!
More on Drowning in Debt: BDO, Ayala Corp, San Miguel and Subprime Emerging Markets
More on Phisix Issues Drowning in Debt: BDO, Ayala Corp and San Miguel
BDO’s USD700 million Senior Notes
At the end of August, BDO Unibank announced a US dollar denominated bond offering worth “USD700 million in Fixed Rate Senior Notes under the Bank’s Medium Term Note (“MTN”) Program. This will be the second drawdown under the Program following the USD300 million issued in October last year”. The said issuance has been intended to “to tap longer-term funding sources to support BDO’s lending operations and general corporate purposes”.
Interestingly, BDO repaid USD $300 million (Php 14.931 billion - according to its 2Q 17Q) of Senior Notes issued in 2012 last February 2017. Remember, it borrowed the same USD300 million in October 2016. So perhaps it borrowed in October 2016 to repay the same amount in February 2017. Or perhaps, part of such repayment came from the January’s Php 60 billion Stock Rights Offering (SRO). Nevertheless, BDO has expanded borrowing from the public worth USD700 million for a total of USD $1 billion.
Hasn’t this episode been fascinating? The inadequacy of BDO’s resources has prompted such fund raising through USD debt ($300 million) and equity via Php 60 billion SRO. While BDO’s stocks have raced to record highs, the series of fund raising has only produced a flat net income for the 1H (-4.12% in 2Q!). Curiously, such subpar performance comes in the face of a raging BSP’s bank lending growth data!
So perhaps more ($ 700 million) borrowing may alter the course of events? And it is borrowing USD at the time when the USD has been rising? Why? Has BDO’s plight been mostly due to its exposure to related party interest?
Ayala Corp’s USD 400 Million Perpetual Bonds
A feat was accomplished by Ayala Corp; it issued perpetual bonds or bonds with no maturity date.
Here is the company’s statement: Ayala Corporation (PSE:AC), one of the largest conglomerates in the Philippines, announced today that it had successfully set the terms of a US dollar-denominated fixed-for-life (non-deferrable) senior perpetual issuance at an aggregate principal amount of US$400 million with an annual coupon of 5.125% for life with no step-up. The issuance is the first corporate fixed-for-life with no coupon step-up in Southeast Asia and the first fixed-for-life with no step-up (and reset) deal in the Philippines. The Notes will be issued by AYC Finance Limited (a wholly-owned subsidiary of Ayala Corporation) and will be guaranteed by Ayala Corporation.
In Asia, perpetual bonds issuance has been in a furor. The “niche, high-risk instrument that was once at the very periphery of the region’s capital markets” notes the Financial Times, has registered a record year in Asia-ex Japan. As of June, Dealogic noted that $8.5 billion worth of perpetuals has been sold compared to $7.8 billion in 2016.
Fixed-for-life products means perpetuals without the penalising increase in yield. No step up simply means fixed rates.
The risks befall on the buyers because there is no incentive for the issuer to call the security. That means the bond can remain outstanding for a very long time, according to the FT, beyond the point where an investor can make a reasonable guess on the borrower’s creditworthiness.
In short, perpetuals function as free lunches for issuers whose risks would entirely be borne by its buyers/subscribers.
SMC Global Power Holdings Plans to Acquire Php 35 billion of Debt
San Miguel Corporation, through its subsidiary SMC Global Power Holdings Corporation, confirmed plans to obtain up to “Php 35 billion worth of debt securities, with an initial tranche of Php 25 billion, under a shelf-registration program to refinance its outstanding dollar-denominated debts totaling $400 million…” Such fund raising activities have been meant “to minimize foreign exchange losses, payment of the dollar-denominated loan obligations of SMC Global Power have been gradually made”.
SMC doesn’t even minced words. They did not say that such activities were intended for purposes of “working capital or business operations or for expansion”. No, SMC barefacedly announced that it would be borrowing for the sake of paying down or “refinancing” its US dollar denominated debt! Yes, Debt in, Debt out, Period!
And it is not a given that such borrowing binge would lead to a reduction of the company’s USD dollar debt. What is certain is that SMC’s debt profile will continue to balloon.
And more importantly, markets will continue to incredibly ignore or be blasé of SMC’s decaying financial conditions. Conditions, of which, has totally been dependent on the eternity of negative real rates. After a remarkable rip in 85.34% 2016, year-to-date, SMC shares have been up by 5.09%!
Enabled and facilitated by the BSP’s ZIRP or negative real rates policy, these invisible subsidies have only been exacerbating systemic risks. And for the establishment, such risks have been permanently buried into nihility.
Thus, beyond all the hype about G-R-O-W-T-H, what we are seeing instead has been the tremendous expansion in the leveraging of corporate balance sheets.
Where debt should have delivered growth (productive debt), it has instead engendered a debt multiplier (credit financed inflationary growth)!
Flattening Philippine Yield Curve Indicates Transition to Tight Money
Here’s more.
While bank lending growth data continues to sizzle at near historic levels, developments in the bond markets point to monetary tightening.
Because of higher inflation expectations, yields of Philippine Treasury bills have climbed (upper left window).
Interestingly, based on the BSP’s consumer confidence survey which showed LESS optimism for the 3Q, the reasons provided were as follows: “According to respondents, their less favorable outlook for the current quarter was due to the following reasons: (a) anticipated higher prices of commodities which could lead to higher household expenditures, (b) peace and order problems (particularly, crisis in Marawi City), (c) low or no increase in income, and (d) expected increase in the number of unemployed persons. Respondents also cited other concerns on occurrence of calamities during the third quarter and poor health.”
In other words, the above represents a boomerang of the BSP’s debt monetization program! And short term yields have imbued most of such expectations.
On the hand, the huge rally in 10-year US Treasury Notes appears to have filtered into ROP (Republic of the Philippines) local currency 10-year equivalent. A furiously rallying UST has occurred consonant with the plunge of the US Dollar index.
Rising short term yields in the face of declining long term equate to a flattening yield curve. A flattening curve may affect the banking system’s internal yield curve and thus result in the compression of net interest margin. While reduced spreads may compel some banks to reduce credit issuance, other banks may react with bigger volumes issuance. The latter comes with a tradeoff in credit quality.
Nevertheless, flattening yield curves will pose a barrier to the banking system’s income.
Could BDO’s SRO and US dollar denominated borrowings been positioned for this?
The domestic curve has narrowed significantly compared to the yearend spreads of 2016 and 2015. The yield curve’s belly, the spread between 5 and 10-year bonds, has bounced from last week’s marginal inversion (or negative spreads). And current dynamics has not signified an anomaly. Even as the BSP has reactivated its emergency tool, the belly has been flattening since April (lowest window)
Like the USD php, current dynamics in the bond markets has been indicative of a transition towards tight money.
Drowning in Subprime Emerging Market Debt!
The overwhelming responses to USD issuances of Ayala Corp’s perpetuals and BDO’s Senior Notes, as well as the latest falling yields of ROP local bonds, have been tied or linked with global affairs.
Activities of global central banks have most likely influenced the outcome of these activities.
Bank of America Merrill Lynch's Chief Investment Strategist Michael Hartnett estimated that “there has been $1.96 trillionof central bank purchases of financial assets in 2017 alone, as central bank balance sheets have grown by $11.26 trillion since Lehman to $15.6 trillion”
Central bank buying of financial assets translates to subsidies to debtors or issuers of debt securities or to current holders or owners of these assets. Since central banks have been perceived as providing price level support, money flows have been encouraged into the same class of assets in the same markets
However, since central bank acquisitions of financial assets extrapolate to lesser inventories available for the markets, money flows will likely spread or tap adjacent markets or the same class of assets in different markets or on markets which have been anticipated to benefit from the next set of actions by global central banks.
Moreover, the tsunami of liquidity thrown into the financial system by global central banks has limned a scenario of significant improvements in the global economy. This impression of growth has reduced perceived strains in the system, thus, has partly fed into the dumping of the USD dollar!
And the falling US dollar has spurred a buying fiesta on subprime emerging market debt!
Excerpts from four different articles below demonstrate such emerging market debt binge.
The article’s charts can be seen above which have been arranged accordingly.
Investors’ thirst for yield has lured many a dollar-bond virgin to market this year, with Tajikistan the latest to be testing the waters. The Central Asian nation starts investor meetings on Thursday, and may sell dollar notes thereafter, a first for Tajik President Emomali Rahmon, who last year won a referendum to rule the remittances-dependent country for life. Tajikistan wouldn’t be the first sovereign issuer currently rated B- by Standard & Poor’s to sell dollar-denominated bonds in 2017, with at least five others issuing. But at $850, it has one of the lowest GDP-per-capita ratios of all the sovereigns S&P rates. Rahmon also wouldn’t be the first supreme leader to sell dollar bonds this year, with Aleksander Lukashenko of Belarus -- dubbed Europe’s last dictator by former U.S. Secretary of State Condoleeza Rice -- issuing $1.4 billion of notes in June.
Ukraine is taking advantage of a surge in appetite for high-yield debt to make its first return to Eurobond markets since a $15 billion restructuring in 2015. The eastern European nation has mandated JPMorgan Chase & Co., Goldman Sachs Group Inc. and BNP Paribas SA for the sale of dollar-denominated sovereign bonds, according to three people familiar with the situation, who asked not to be cited because details are private. Rothschild & Co. is advising on the deal, the people said. Ukraine is joining other junk-rated borrowers in making the most of the lowest emerging-market borrowing costs in four years to sell new dollar debt. Argentina convinced investors to buy 100-year debt in June, Iraq last month tightened pricing on a $1 billion Eurobond sale after orders were oversubscribed and Tajikistan is planning a debut sale later this month…The yield on Ukrainian bonds due in 2019 dropped 33 basis points on Wednesday to a post-restructuring low of 5.16 percent, heading for the biggest daily drop since March.
Every African nation that’s sold dollar debt now has at least one junk rating, but it would be hard to tell by looking at the bond market. The average yield on sovereign Eurobonds in Africa has hovered near the lowest level in two years this month, according to a Standard Bank Group Ltd. index, even after Moody’s Investors Service cut Namibia to below investment grade on Aug. 11. The world’s biggest producer of marine diamonds had been the continent’s only dollar-bond issuer without a junk rating. A low interest rate environment in the developed world has encouraged investors to look past the problems plaguing African economies, including low commodity prices, dollar shortages in some of them and rising political tension in others.
Currency stability, paltry yields in developed markets, and low volatility have spurred inflows to developing nations this year, while subdued outlooks for inflation and dovish monetary policies have juiced returns on local credit…One quantum of solace: non-resident ownership of local-currency government bonds in all developing nations -- including in Asia and Latin America -- is below the average of the past four years, according to a Deutsche Bank analysis of 18 markets, suggesting global inflows have room to increase if economic growth accelerates. Also adding support is market skepticism about a U.S. rate increase this year, with traders now assigning just a 25 percent probability…The share held by foreigners hit 22.4 percent in July for a 0.9 percentage-point increase this year. That’s below the 22.8 percent average notched since April 2013, just before hawkish Federal Reserve chatter spurred a harsh selloff known as the Taper Tantrum. Positioning also remains below the post-crisis peak of 24.5 percent posted January 2015.
From the PSE to emerging markets, the world has been drowning in in debt!
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