Philippine National Bank shares on collateral for PAL

Biggest shareholder to buy back airline stake.

The Philippine National Bank's (PNB) single biggest shareholder Dr. Lucio Tan has reportedly signed a joint agreement with San Miguel Corp. to buy back a 49% stake in Philippine Arilines. PAL has yet to confirm the reports.

According to a research note from Maybank Kim Eng, several newspaper articles reported the deal was worth USD1b and funding of USD780m will be through bridge financing from four local banks.

BDO Unibank Inc. will reportedly provide USD360m while sister company China Banking Corp. will budget another USD100m, for a total of USD460m from the Sy-owned banks. Asia United Bank will shell out USD70m.

Here’s more from Maybank Kim Eng:

Underlying collateral for BDO includes PNB and LT Group shares while CHIB and AUB will get LTG shares. LTG's banking unit PNB will commit USD250m, and reportedly agreed to accept real estate assets as security. Payment will be made within a week.

We have a BUY rating on PNB as we consider the bank a prime M&A play. Recall that in 2012, third-largest Bank of the Philippine Islands offered to buy the stake of Dr. Tan at PHP96/sh or around 1.7x PBV.

Although the deal feel through because of apparent last-minute glitches, market rumours of PNB being on sale persist. Several banks reportedly are still interested.

We believe using PNB shares as collateral is in line with usual loan practices. However, it does seem to point to the Sy family being favoured in the event Dr. Tan decides to sell PNB.

Without any more information, we think other interested parties may yet be able to acquire PNB since the pledged shares can be redeemed by the potential buyer as long as the terms of the above laon agreement are not onerous or restrictive.

If they are, then PNB may no longer be in play for M&A. This would change our rating as projected ROE in 2016 is only single-digit. For now, maintain BUY.