(Bloomberg) -- Top Philippine firms are looking to manage their debt payments by using the new peso interest-rate swap facility, a move that may bolster the nation’s push to deepen its capital market.
But the companies said they would like to first see the market gain traction, with sizable volumes and a well-established yield curve, and produce pricing benchmarks that reflect market conditions.
“This would be a good facility to help corporates manage interest exposures versus interest rate movements,” said Frederic DyBuncio, president and CEO of SM Investments Corp., the largest company in the Philippines’ main stock index. The swap market, he said, needs to have sufficient liquidity to enable efficient pricing.
Interest rate swaps, a staple hedging facility in more developed fixed-income markets, allows parties to protect themselves against changes in market interest rates or take position on the direction of borrowing costs by exchanging one stream of future interest payment for another.
The Philippines’ peso IRS market got off to a slow start after it opened on Nov. 18, with deals worth 250 million pesos ($4.2 million) executed with a one-month tenor.
“It would be a good product to access eventually when it has enough liquidity already. But this is a good first step,” said Jose Emmanuel Hilado, chief financial officer at Aboitiz Equity Ventures Inc.
In Thailand, transactions in the swap market have outpaced bonds. The average daily swap volume this year stands at over $3 billion, according to data compiled by SwapClear, the top clearing house for IRS. That compares with average daily trade of about 77 billion baht ($2.2 billion) for all Thai bonds, data from the Thai Bond Market Association showed.
As interest rates drop, Philippine companies that have issued bonds at a high fixed rate may be keen on a product that lets them receive a stream of interest payments based on a fixed rate while paying their counterparties a stream of floating-rate payments.
Sixteen banks, including BDO Unibank Inc., Bank of the Philippine Islands and Metropolitan Bank and Trust Co., have committed to quote two-way prices for swaps of various tenors — from one-month to 10-year — against the overnight reference rate. Active trading could result in better benchmarks for pricing loans.
San Miguel Corp., the country’s biggest company and also one of its most indebted, may consider using the facility, according to Chief Financial Officer Ferdinand Constantino. “We need details,” he said.
Philippine firms have outstanding peso-denominated bonds of about 1.27 trillion pesos, based on data compiled by Bloomberg.
It’s hard to tell when they will start using the interest hedging mechanism as there has been no such facility in the country for a long time, and there’s the usual birthing pains that come with anything that’s new, executives said.
“When you have a new product like that, banks will start offering it to clients or corporates and as they get to understand the product, they eventually get their respective lines and approvals in place,” said Hilado of the Aboitiz conglomerate. “As more players enter, liquidity eventually improves and a good market will evolve.”
--With assistance from Marcus Wong.
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