IFR issuer profile: San Miguel

IFR Asia, October 2009

When the global credit markets dried up in G3 currencies, many argued there was an opportunity for Asian local currency bond markets to prove their worth as an alternative funding source. There’s really no question which deal gave the clearest illustration of the liquidity that could be accessed outside the mainstream markets: the Ps38.8 billion (US$800 million) bond in Philippine pesos for San Miguel Brewery in March.

Led by HSBC and the Development Bank of the Philippines, this was the largest local currency debt issue in Philippine pesos by a multiple of four – in the middle of a global financial crisis. And this for a first-time issuer too. There really was little to suggest that this deal could get away. “It was originally going to be done either in the offshore market, or as an onshore/offshore combination,” says Rod Sykes, managing director and head of debt capital markets Asia Pacific at HSBC. “What makes it all the more significant was that with this deal they basically removed the need to move offshore, and that set a new benchmark in terms of size and capacity for the domestic Philippine peso market.”

The issue came about because of San Miguel Corp’s spin-off of its San Miguel Breweries business. SMB is an iconic and powerful brand. “It’s obviously a hugely popular name, the largest in the Philippines, with a 95% market share, and the largest publicly listed food, beverage and packaging company in southeast Asia,” says Sean Henderson, head of debt syndicate Asia Pacific at HSBC. It needed funds to buy brewery and land assets from parent San Miguel Corp, which in turn was a condition set by the arrival of Kirin Brewery as a majority shareholder in SMB.

Despite the issuer’s great brand appeal in the Philippines, it is worth recalling just how bad things were at the time of this deal. “At the time this was done we were in a period of intense and extreme market volatility, and for many names the cross-border markets were not really open,” says Sykes. A handful of deals were getting done, notably a bond for the Indonesian sovereign a month earlier, but at a price – Indonesia paid 11.625% on the 10-year component of that dollar deal.

Working out how the size and price was a challenge since nobody had ever sought such a large deal in the peso market before. The leads went out with guidance of 250 to 325 basis points over government benchmarks, and the tight end of that guidance despite the size, pricing at governments plus 250. There were three tranches: a three-year at 8.25%, a five-year at 8.875% and a 10-year at 10.5%. A wide range of buyers bought in: institutional banks, pension funds, and insurers, bringing a broad order book of around Ps45.6 billion. It helped that the leads had invited in every major domestic institution in the country to joint underwrite – BDO Capital, BPI Capital, China Bank, First Metro Investment Corp, ING, Land Bank of the Philippines, Philippine Commercial Capital, Rizal Commercial Banking Corp, and Standard Chartered Bank.

Also working in San Miguel’s favour was the rarity value – the first issue as San Miguel Brewery – and the fact that a good and beverage company is viewed as recession resistant. But even so, this was a remarkable response. “It’s about the domestic market having stepped up to the plate, and over delivered in terms of expectations, the depth and liquidity it provided,” says Sykes.

Since then other Philippine names, such as SM Investments Corp, have shown comfort in raising debt in the Ps10 billion range. Total volumes in pesos are just short of Ps100 billion so far in 2009, compared to just under PS79 billion for the whole of 2008.

Elsewhere, San Miguel Corp was at the time of writing close to signing a US$600 million three-year bullet loan with a dozen arrangers to refinance debts; it’s a popular credit. But it’s the bond issue that will be remembered, and its impact on the local markets will be felt for some time to come.