On the surface, August looked like a terrible month for the Philippines’ International Container Terminal Services (ICTSI) to issue bonds.
Asian financial markets were reeling from a surprise devaluation of the Chinese renminbi, Europe was still recovering after Greece had come close to leaving the Eurozone, and hawkish comments from members of the US Federal Reserve were raising concerns that interest rates would rise soon.
Bonds spreads had widened accordingly, creating violent seas for issuers to navigate. Big names, including Chinese state-owned enterprises, which had reopened markets when things were volatile in the past, were waiting for the clouds to clear.
ICTSI sailed through this storm with an offering of an unrated US$450m perpetual bond and, in the process, breaking a two-month drought for offshore issuance from the Philippines.
A US$1.8bn order book easily dispelled concerns that such a format could fall flat with risk-averse investors wary of a rate hike on the horizon.
“People always told me a perpetual is a bull-market trade,” said Joel Consing, ICSTI’s Manila-based treasurer. “However, I felt that, despite the weakness at the time, if we structured it properly and timed it well, we could price it properly.”
The company had enjoyed success in January with US$300m of perpetual notes, but that trade had been supported with a tender offer for its outstanding notes issued in 2011, meaning there was only a small element of new money, and plenty of demand to create price tension.
ICTSI made a tweak to that structure when it returned, expediting the coupon step-up to its first call date rather than the second, which helped the company tap an investor base that was becoming increasingly concerned about higher rates, but was still looking for yield.
Tapping into that specific investor need was the key in a nervy wider market, and ICTSI did just that. The port operator ended up with a larger size and a lower cost of funding as opposed to its January trade, launched at a time when markets were much more conducive.
ICSTI is still one of the few issuers out of the Philippines to have pioneered the use of senior perpetual notes, and the response to August’s trade is widely expected to provide a template for other peers to follow.
The senior format helped ICTSI outshine SMC Power Global, which hit the market a day later, but struggled to amass demand for its offering of a subordinated perpetual bond.
“We’ve opened the market for senior perpetuals, paving the way for corporations to fund in this format in the future,” said Consing.
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