Bloomberg News

San Miguel Lures Funds With Yields Amid Record-Low Rates

September 16, 2012

San Miguel Lures Investors Amid Record-Low Rates: Southeast Asia

San Miguel Corp., which started as a brewer eight years before the Philippines declared independence in 1898, has expanded into oil, power, infrastructure, mining and aviation to triple the return on equity of about 7 percent it has been earning from the food and beverage businesses, President Ramon Ang has said. Photographer: Brent Lewin/Bloomberg

San Miguel Corp.’s preferred shares were snapped up by investors including state-owned funds managing pensions for 30 million people as they offer returns that are 60 percent higher than similar-dated government bonds.

Metropolitan Bank & Trust Co. (MBT), Union Bank of the Philippines and Rizal Commercial Banking Corp. (RCB) said they bought the Manila-based company’s shares. Their purchases will help the nation’s biggest company and sole issue manager HSBC Holdings Plc (HSBA) sell 80 billion pesos ($1.9 billion) of securities, the country’s largest share sale. The offer closed Sept. 14.

San Miguel, the brewer that expanded into oil refining and aviation, will use the funds to redeem preferred shares held mostly by the government. It will pay dividends of 7.5 percent to 8 percent on the shares, which are callable in five to 10 years. The yield on benchmark 10-year government debt fell to 4.87 percent on Sept. 13, the lowest since 1998 when Bloomberg started compiling the data. The same day, the central bank kept its benchmark rate at a record-low 3.75 percent.

“The yield is quite superior relative to what the market has to offer,” said Victor Valdepenas, president of Union Bank (UBP), which is underwriting 6 billion pesos of the offering. “There’s a lot of interest from individual investors. We’re also happy to have it as our own investment.”

Metropolitan Bank also bought some shares because of the dividend yields, said Allan Yu, who helps manage about $9.4 billion at the nation’s second-largest lender.

Flexibility Premium

San Miguel is offering a higher dividend because the preferred shares are perpetual in nature, leaving it with the choice to call them if it can access cheaper financing or to leave them if the cost of financing rises, Valdepenas said.

“This option is something that works for San Miguel because it gives them flexibility from a funding standpoint,” he said. “To entice investors, you have to pay a premium for that, and that is built into the price of San Miguel.”

The preferred shares “allow you to get yield enhancement with the possibility of capital market appreciation especially now that most of the preferred shares are listed,” said Rico Gomez, who helps manage 84 billion pesos at Manila-based Rizal.

San Miguel, which started as a brewer eight years before the Philippines declared independence in 1898, has expanded into oil, power, infrastructure, mining and aviation to triple the return on equity of about 7 percent it has been earning from the food and beverage businesses, President Ramon Ang has said.

Infrastructure Story

The company seeks to boost sales to $30 billion by 2017 from a forecast $20 billion this year, at least three years ahead of target, Ang, 58, said in an interview in April. Second- quarter net income jumped 54 percent to 5.62 billion pesos, the most in a year.

“This company provides investors an infrastructure story that jives with the targets we’ve set for the economy,” said Jonathan Ravelas, BDO Unibank’s chief market strategist.

The preferred shares were sold at 75 pesos each in batches as small as 500 shares per order. The proceeds will be used to redeem 73 billion pesos of similar securities, according to the prospectus posted on the company website. San Miguel will redeem the government’s stake, Ang said on June 14. The government holds the equivalent of about 23 percent of San Miguel’s common and preferred stock, according to Bloomberg calculations.

The preferred shares held by the government, which were issued in 2009, also yield 8 percent.

‘Strike a Balance’

“San Miguel has to strike a balance between attracting retail investors and saving on the cost of money related to the preferred shares series 1,” said Bernard Avinante, an analyst at Wealth Securities Inc. in Manila, referring to the stake held by the government.

The securities being sold are non-voting and cannot be converted into common shares, according to the terms. Purchases of local companies are tax-exempt, while those by individuals are subject to a 10 percent withholding tax. That compares with a 20 percent levy on local buyers of government securities.

“It is no secret that our demands are for longer-yielding assets,” said Robert Vergara, president of Government Service Insurance System, the nation’s biggest state-owned fund that manages pensions for more than a million workers. The fund is “looking” at the security, he said Sept. 11. Social Security System, the state-run fund for private-sector workers, applied to buy shares, Commissioner Diana Pardo-Aguilar, who also chairs the investment oversight committee, said on Sept. 15.

Risk Factors

Government Service seeks to earn 9 percent annually from investments to provide retirement, life insurance and health- care benefits to government workers, while Social Security requires 7 percent.

Low interest rates “make our job very, very challenging to deliver the kind of returns that maintain our actuarial viability,” Vergara said.

San Miguel’s attractive yield also comes with certain risks, said Astro del Castillo, managing director at First Grade Finance Inc.

Dividends may “be declared at the discretion of the board of directors and will depend upon SMC’s future results of operations,” according to the prospectus. San Miguel will need to pay at least 300 basis points more than longer-dated benchmark debt if it’s unable to redeem the securities on the fifth, seventh and 10th years.

“While San Miguel has a track record of paying dividends, there are also uncertainties beyond the company’s control,” del Castillo said. The preferred shares are competing with common shares in the stock market, which can offer higher returns near- term because of the positive outlook, he said.

The benchmark stock index had risen 22 percent this year.

HSBC Ranking

The deal will help HSBC keep its ranking as the nation’s top debt arranger for a second year, based on data compiled by Bloomberg. It will surpass Standard Chartered Plc (STAN), which had underwritten 41.4 billion pesos worth of deals that accounted for 28 percent of the total so far this year. That’s double the value of deals HSBC arranged prior to San Miguel, data show.

The amount has been fully underwritten, with sole issue manager HSBC committed to 58.5 billion pesos, and BDO Capital & Investment committed to 5 billion pesos. The rest of the bookrunners are underwriting as much as 2 billion pesos each, according to the prospectus.

“It’s an issue that is easily absorbed by the market given the liquidity in the system,” Union Bank’s Valdepenas said.

To contact the reporters on this story: Cecilia Yap in Manila at cyap19@bloomberg.net; Clarissa Batino in Manila at cbatino@bloomberg.net

To contact the editors responsible for this story: Lars Klemming at lklemming@bloomberg.net; Colin Keatinge at ckeatinge@bloomberg.net


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