Heavy inflow of foreign investments seen

Citi exec sees more cross-border M&AS

THE PHILIPPINES is expected to see a heavier influx of foreign direct investments this year as its robust consumer market offers a fertile ground for cross-border merger and acquisition (M&A) deals, an investment banking expert from Citibank said.

Kristine Braden, head of Citibank Philippines’ global banking unit, said many offshore

investors were increasingly interested in plowing funds into the domestic economy, particularly in the financial and consumer sectors. Such investments could be executed this 2012 on top of portfolio investments likely flowing to a good pipeline of bond and equity offerings by local corporations, she added.

At the same time, Braden said a number of cash-awash Philippine corporations were on the prowl for offshore investment opportunities. She said they were looking for overseas acquisitions complementary to existing businesses, citing power generation companies wanting to gain a foothold in coal mining.

“We’re starting to notice an increased interest in cross-border M&AS and I’m happy given that FDI in 2011 was actually relatively low compared to 2010,” Braden said in an interview with the INQUIRER last week.

In the consumer sector, for instance, Braden said that at least once a week, a new investor would touch base to scout for domestic opportunities. She said these prospective investors would like to ride on the country’s resilient consumer market, which continued to be supported by overseas remittances and business process outsourcing revenues.

“If you’re looking at growing population, continued strength of consumers as a driver of the economy, there aren’t that many countries where you can find those dynamics today,” Braden said, adding that such strong underlying fundamentals plus abundant liquidity were very attractive for investors. “So we expect to attract several inflow consumer transactions in 2012,” she said.

Like the case of Malaysian banking giant CIMB in talks to buy into Bank of Commerce, Braden said regional banks could find opportunities in investing in medium-sized banks.

Other sectors like infrastructure, tourism and mining were also becoming interesting, she said. In the local power sector, she said there could be some minor M&A deals involving the entry of strategic minority partners to fund a new round of capital expansion or undertake something related to off-take requirements.

On the bond market, Braden said some new deals might come through in the second quarter and toward the end of the year following the Philippines’ suc- cessful return to the offshore bond market and again doing the region’s curtain-raiser.

“The interest rates offshore are just compelling at the moment. For the ROP (Republic of the Philippines) to raise 25-year money at 5 percent (a year), this creates a great benchmark for other issuers,” Braden said. “The thing is, at the end of last year, US dollar rates spiked so it became less attractive to raise debt offshore but now with the interest rate so low, I think people may go back and reconsider doing dollar bonds.”

She said the government’s recent return to the US dollar bond market after focusing on peso-denominated global bonds in the past was still a good fit to the sovereign’s liability management strategy. “They will always need to maintain a relationship with foreign investors and they did it with such a low rate for such a long term. It was a blowout success,” she said.

Citi was among the arrangers of the Philippines’ recent $1.5-billion global bond issue.

With the Philippine stock market outperforming all its peers in the region and remaining buoyant this year, Braden said equities would remain interesting this year. With the requirement of the Philippine Stock Exchange for listed companies to maintain a minimum of 10-percent public float, she said this would spur some follow-on offering.

“But I think that beyond that, with the domestic exchange doing relatively well and again the Philippines being one of the better-performing economies, it will pique the interest of investors and issuers to go the market,” Braden said.

“The key is to define from what part of the world the investments are coming from and I suspect that a lot of the interest will still be anchored off Asian liquidity. US investors are interested in the Philippines as well,” she said.

Finally, Braden said she expected hybrid instruments like convertible bonds (CB), debt paper that the holder can convert into common stocks or cash of equal value, with the presence of two factors that traditionally fuel interest in these instruments— volatility in equity markets and low interest rates.

She noted that the Philippine market has not seen any CB issuance lately and instead favored preferred shares.