By Alexandria Grace C. Magno, Reporter
THE Philippine Stock Exchange’s (PSE) new preferred-share listing rules could bring more privately held companies into the public market by allowing them to raise capital without listing or diluting their common shares, analysts said.
Toby Allan C. Arce, head of sales trading at Globalinks Securities and Stocks, Inc., said the changes could provide established private companies with a more gradual route into the public market while allowing controlling shareholders to retain ownership of their common equity.
“The PSE’s new preferred-share rules are a constructive step because they lower the barriers for companies that want access to public capital without undertaking a conventional common-share initial public offering (IPO),” he said in a Viber message last week.
Mr. Arce said the rules allow companies to list preferred shares even without listing their common shares, either through an IPO or direct listing.
He said the minimum offer for an IPO is P100 million with at least 100 shareholders, while the direct-listing route allows eligible privately placed preferred shares to become tradable upon listing, subject to transfer restrictions and a subsequent requirement to distribute at least P50 million of the same class or series to at least 100 investors within one year.
“This significantly broadens the range of companies that can realistically consider the PSE as a financing venue,” Mr. Arce said.
He said the direct-listing option could serve as a bridge between private fundraising and the public market because a company could initially place preferred shares with institutional investors and later establish exchange liquidity without conducting a traditional IPO at the outset.
“At the same time, the PSE has retained a mechanism to broaden ownership by requiring eventual distribution to at least 100 investors,” Mr. Arce said.
“That balance could make the framework attractive to established privately held companies that need substantial capital but whose controlling shareholders are not prepared to dilute ownership or expose their common equity to public-market valuation,” he added.
Mr. Arce said property, infrastructure, power and renewable energy, utilities, and large diversified companies could be among the biggest beneficiaries because these businesses frequently require long-duration capital for expansion but may not want additional common-equity dilution.
He said banks and other financial institutions could also find the structure useful where preferred equity fits their regulatory capital and funding requirements, subject to Bangko Sentral ng Pilipinas rules.
F. Yap Securities, Inc. investment analyst Liam Limbo said small and medium-sized enterprises (SMEs) and companies undertaking capital-intensive projects could also benefit from the framework.
“Small to medium enterprises and firms engaged in capital-intensive projects will benefit the greatest. Yet, reception will still hinge on whether the PSE will afford these firms more lax reportorial requirements, as this is one key reason why firms shy away from listing in the first place,” he said.
Mr. Arce, however, said the new rules alone would not necessarily trigger a surge in listings because companies would still compare preferred shares with other financing options.
“I would not expect the rules alone to produce a flood of new listings, however,” he said.
“They address an important supply-side problem by making the listing framework more flexible, but companies will still compare preferred shares with bank loans, corporate bonds, and private placements based on pricing, execution speed, and disclosure requirements.”
Mr. Arce said the key question would be whether the new framework makes preferred-share listings sufficiently attractive for companies that previously viewed a PSE listing as burdensome for what is essentially a fixed-income-like security.
He said the rules also allow shelf listings for preferred shares that may be offered in multiple tranches over as long as five years, subject to the validity of the Securities and Exchange Commission’s shelf registration.
Mr. Arce said the provision could benefit companies with multiyear capital expenditure programs because they could raise funds as needed instead of securing the entire amount upfront.
“For issuers, another important advantage is that preferred shares can diversify funding sources,” he said.
“Companies heavily reliant on bank borrowing or bonds gain another pool of capital, while controlling shareholders can raise funds without necessarily surrendering voting control.”
Mr. Limbo said F. Yap Securities has observed strong client demand for preferred shares.
“We observe a strong appetite from our clients for preferred-share listings, given these offer more stable yields — especially attractive during more volatile periods,” he said.
“And this may unlock improved foreign participation, although the key driver still rests on the business model and strategies that will be adopted by listed firms.”
Mr. Arce, meanwhile, cited San Miguel Corp.’s P30-billion preferred-share offering, which he said was reportedly 3.27 times oversubscribed, as evidence of investor appetite for preferred shares from established issuers.
He said additional supply would still have to compete with government securities, corporate bonds, and other income instruments.
“The biggest determinant of demand will be yield,” Mr. Arce said.
“Preferred shares effectively compete with government securities, corporate bonds, and other income instruments, and that hurdle is relatively high in the present environment.”
Mr. Arce said new preferred-share offerings would have to provide an adequate premium over government securities to compensate investors for credit risk, potentially lower liquidity, and the fact that preferred shares generally rank below debt in an issuer’s capital structure.
He said credit quality and dividend sustainability would also be important in determining investor demand.
“Issuers with strong balance sheets, stable cash flows, and recognizable franchises should be able to raise capital more efficiently, while weaker companies may have to offer substantially higher dividend rates,” he said.
Mr. Arce said secondary-market liquidity could also pose a challenge because some Philippine preferred shares trade relatively thinly after issuance, reducing their attractiveness to investors who may need to exit before redemption.
“The PSE therefore needs to complement easier listings with measures that deepen secondary-market liquidity and broaden investor participation,” he said.
“Otherwise, the reform could succeed in increasing the number of securities listed without producing a proportionate increase in actual trading activity.”
Mr. Arce said the new framework should be viewed as a market-development measure rather than an immediate transformation of the preferred-share market.
“They give companies another route to public capital, potentially expand the PSE’s issuer base beyond companies willing to undertake common-share IPOs, and provide investors with additional income-oriented securities,” he said.
“But the ultimate success of the framework will be determined less by the rules themselves than by pricing, issuer quality, and liquidity.”
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