RATING NEWS 17 March 2014 The Pioneer Domestic Credit Rating Agency

SM Investments’ Bonds Get PRS Aaa Rating

The proposed bond issue of SM Investments Corporation (SMIC) of up to P15 billion received a PRS Aaa rating from Philippine Rating Services Corporation (PhilRatings). SMIC is the holding company of the SM Group.

Obligations rated PRS Aaa are of the highest quality with minimal credit risk. The obligor’s capacity to meet its financial commitment on the obligation is extremely strong. PRS Aaa is the highest rating assigned by PhilRatings.

The rating reflects SMIC’s solid financial profile, backed by strong liquidity and a sound capital structure; its clear growth strategy, supported by solid brand equity; and core companies with very strong market positions, sustained earnings and recurring cash flows. The rating also considers the favorable outlook for the industries of SMIC’s core businesses, as these industries continue to benefit from the strong growth of the domestic economy.

PhilRatings’ rating is based on available information and projections at the time that the rating was assigned. PhilRatings shall continuously monitor developments relating to SMIC and may change the rating at any time, should circumstances warrant a change.

Albeit slightly lower from a year ago, SMIC’s current ratio is still considered as more than adequate at 1.2x as at end-2013. Liquidity is projected to remain healthy, backed by strong, recurring cash flows from the Group’s retail and mall operations which primarily cater to the mass market and are therefore, less vulnerable to economic downturns. Operating cash will remain positive and also, as the Group’s main funding source. On a Parent company basis, liquidity is supported by the regular upstreaming of dividends from and the payment of management fees by subsidiaries and associates.

Capital structure remained sound, as share of gross debt to capitalization improved to 44.2% as at end-2013 (2012: 45.7%). Total debt posted a minimal hike of 8%, while equity went up by 14.8% due to increases in retained earnings and additional paid-in capital. As at end-2013, debt-to-equity (DE) ratio stood at 0.8x.

Debt usage is expected to remain well-managed, with DE ratio kept below 1x for the projected period 2014-2025. Equity growth will be supported by the plowback of earnings into operations.

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Growth has been aggressive, but has also remained focused on keeping market leadership and maximizing synergies within the SM Group. The SM Group continues to look for opportunities and acts accordingly when these opportunities arise. It has consistently pursued its expansion plans through the Philippine economy’s highs and lows, successfully adopting and anticipating necessary changes to suit the demands of the times.

The consolidation of its property-related businesses is expected to result in a more focused and simplified structure for the SM Group, with the consolidation resulting in three core businesses: retail operations, banking and property.

SM Prime Holdings, Inc. (SM Prime) is the country’s leading shopping mall developer and operator. With the opening of its two malls in 2013 (SM Aura and SM BF Parañaque in May and November, respectively), SMIC ended the year with 48 malls with a total gross floor area of 6.3 million square meters. As at December 31, 2013, the SM Retail Group had 241 stores nationwide: 48 department stores, 39 SM supermarkets, 93 SaveMore stores, 39 SM Hypermarkets and 22 Walter Mart stores.

Following its joint venture with the Walter Mart Group, SMIC continues to explore other joint venture and acquisition opportunities as part of its efforts to retain leadership in the retail and shopping mall businesses.

BDO Unibank, Inc. (BDO) continued to lead the country’s banking industry, in terms of assets, loans, deposits, capital and trust funds under management as at December 31, 2013. The bank has one of the largest distribution networks, with more than 800 branches and over 2,200 automated teller machines (ATMs) nationwide. BDO’s capital adequacy ratio (CAR) stood at 15.8% as at end-2013, indicating that the bank is ready for Basel III implementation. Its non-performing loan (NPL) ratio, an indicator of asset quality, was a low 1.6%.

Residential offerings of SM Development Corporation (SMDC) continued to be well-received by the market, as mirrored by the very good take-up of SMDC projects. Available SMDC units since 2005 totaled 55,823 units, of which 45,215 units (or 81%) have been sold as of September 30, 2013. New units in 2013 numbered 10,659, of which 6,407 have been sold in the first nine months of the year. SMDC had a vast landbank of 133.1 hectares, as of end-September 2013.

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