Costly Petron refinance plan raises red flags

Tycoon Ramon Ang-led Petron Corp. has persuaded nearly 70 percent of holders of its $550-million perpetual securities to participate in an exchange and tender offer in Singapore, a move presented as investor support for its capital restructuring plan.

Perpetual securities (also called perpetual bonds or perps) are a type of financial instrument with no maturity date.

Investors swapped $333.19 million into new senior perpetual notes and tendered $54.2 million for cash by the deadline on 12 September, the company said in a disclosure on 15 September, reducing the outstanding old bonds to approximately $162.6 million.

The new securities carry a minimum initial rate of 7.35 percent per year, up from the earlier 5.95 percent, and may be redeemed at Petron’s option in September 2028.

Alongside the swap, the San Miguel Corp. subsidiary is issuing new perpetual bonds in Singapore to attract additional capital for refinancing and to support its fuel, refining and retail operations, according to the 15 September report.

While Petron emphasized that the initiative extends its maturity profile and bolsters its balance sheet, regulators and market observers warn that the risks should not be downplayed.

A source at the Bangko Sentral ng Pilipinas (BSP) noted that although Petron is not a supervised financial institution, its importance to the energy supply chain makes its financial stability a matter of national concern.

Trouble through economy

“Any financial trouble at Petron could ripple through the economy, affecting fuel prices and market confidence,” the source, who sought anonymity, told DAILY TRIBUNE.

The main worry, according to the source, is the company’s ability to sustain payments during periods of crisis, particularly in a stagflationary environment where weak demand combines with high inflation and interest rates. The source cautioned that while perpetual securities can be treated as equity, their fixed coupon payments act like a permanent drain on cash flow.

Meanwhile, an economist said the transaction highlights both refinancing and fundraising objectives.

“Convincing nearly 70 percent of holders to exchange for new perpetual notes clearly points to a refinancing objective, helping smooth out maturities and maintain confidence,” the economist, who did not wish to be identified, said.

At the same time, the concurrent issuance of new perpetuals shows a push to raise fresh capital. The risk, the economist warned, lies in the higher cost of capital — from 5.95 percent to 7.35 percent — which could weigh heavily on profitability if refining margins weaken.

Petron’s 7.35-percent initial coupon is toward the upper end of recent Southeast Asian perpetual issuances — higher than the 6.5 to 7.125-percent tranches seen in a large regional perpetual from PTT Global Chemical, and notably above the single-digit coupons typical of investment-grade oil majors.

The gap reflects Petron’s higher credit and structural risk compared to top-rated peers. If the emphasis shifts to raising fresh funds, the danger is over-leverage and investor fatigue, given that perpetual securities have no fixed maturity but carry ongoing coupon obligations.

A banking executive echoed these concerns, pointing to the inherent structural risks of perpetual instruments.

“Petron operates in a cyclical and volatile environment, so cash flows are exposed to swings in crude prices, refining margins, and regulatory risks,” the banker said. “The 7.35-percent coupon compensates investors for those risks, but it also reflects the higher cost of servicing long-term obligations.”

The banker explained that from a regulatory standpoint, such instruments carry higher risk weights and do not count toward banks’ liquidity buffers.

“Exposure to Petron would also be capped by BSP’s single-borrower limits and our own concentration policies,” he added.

For investors, the attractive yield is tempered by the uncertainty of redemption and the permanent pressure on Petron’s balance sheet. For regulators, the stakes are broader: financial stability and energy security.

And for Petron itself, the challenge is clear — balancing the benefits of refinancing with the mounting risks of carrying costlier, long-term debt in an unforgiving global oil market.