BONDS sold by companies in the Philippines may outperform government notes, Asia’s best-performing treasury debt for the past year, as an accelerating economy helps boost profits.
Dollar-denominated bonds of companies such as Philippine Long Distance Telephone Co., the nation’s largest phone operator, have returned 4.4 percent this year, lagging behind the 7.6 percent on notes sold by the government, according to indexes compiled by JPMorgan Chase & Co.
“We’re at a point where investor buying will switch from Philippine sovereign to corporate debt,” said Ken Hu, who helps manage $100 billion at First State Investments in Hong Kong. “People will start to play with the laggards, which are the Philippine corporate bonds.”
Investors are demanding as much as 42 basis points more in yield to buy Philippine company securities than similar-maturity government debt, according to JPMorgan data. For most of the past two years companies were paying on average 26 basis points less than yields on benchmark government securities.
“This is an anomaly,” said Tim Condon, the Singapore-based head of Asia research at ING Groep NV, the largest Dutch financial services company. “The top-quality corporate bond yields will eventually return to below those on their sovereign counterparts.”
PLDT’s $300-million 8.35-percent bonds due in 2017 yield 7.35 percent, more than the average 6.93-percent yield on government securities, according to JPMorgan. The Manila-based company’s notes yielded less than the government debt until six months ago.
Manila-based JG Summit Holdings Inc.’s $300-million 8.25-percent bonds due 2008 yield 7.7 percent. The company owns the country’s biggest snack-food manufacturer. A basis point is 0.01 percentage point.
Corporate debt has performed worse than government bonds on concern rising US interest rates would make it harder for companies to repay dollar-denominated obligations, ING’s Condon said. That threat is receding amid signs US economic growth is slowing. Federal Reserve policymakers stopped raising interest rates this month after 17 consecutive increases.
Investors were also wary of buying company securities because of efforts by opposition parties to oust President Arroyo, who has spurred growth by overhauling tax laws and increasing spending on roads and schools. Mrs. Arroyo survived an impeachment vote on August 24.
Philippine company bond prices may increase by at least 2 percent over the next few months, outperforming government notes, according to Gregory Suen, who helps manage $1.5 billion of debt securities at PCI Investment Management in Hong Kong.
“The Philippines has some companies whose fundamentals are much stronger than their government,” Suen said.
Bondholders are optimistic PLDT will gain because it has a higher credit rating than the government. The telephone operator is ranked BB+ by Fitch Ratings and Standard & Poor’s, one step below investment grade. The rating is one level higher than the state’s foreign-currency rating of BB at Fitch and two levels above BB- at S&P.
The country’s corporate debt is also being helped by forecasts growth will accelerate to as much as 6.2 percent this year, after a 5.5-percent increase in the second quarter. The economy is outpacing the worldwide average of 4.9 percent, based on International Monetary Fund forecasts.
The country’s expansion is lifting corporate profits, which increased an average 23 percent from a year ago, the fourth-biggest gain in the region, according to HSBC Holdings Plc. data.
“Business confidence is returning to an economy that has started to underpromise and overdeliver, reversing the trend of the past few decades,” said Adam Le Mesurier, an economist at Goldman Sachs Group Inc. in Singapore. ---Bloomberg
Business Mirror
September 6, 2006
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