The Philippines credit universe is undergoing a wave of expansion as a host of new names seek to take advantage of low absolute rates while they can. Following the successful debut of a $150 million deal for Banco de Oro last week, Filinvest Land has begun roadshows for a maiden $100 million issue via JPMorgan and ABS-CBN is preparing to launch presentations late next week for a $150 million deal via Credit Suisse First Boston and Bear Stearns.
Also looming in the background is the prospect of a challenging $200 million high yield deal for troubled electricity utility Meralco. The CC-rated group had initially been hoping to launch a deal via its restructuring advisor CSFB in late October, but the latest indications suggest it may not see the light of day until early next year.
Bankers believe the new deals mark a welcome diversification away from the sovereign, PLDT and companies under the umbrella of the Ayala, JG Summit and SMI groupings. For investors they offer the twin prospect of higher yields at a time of few attractively priced alternatives around the rest of the region and a wider differential to the sovereign than has historically been the norm. For issuers, timing appears opportune ahead of presidential elections next May and expectations of rising interest rates from the third quarter of next year.
The sovereign itself is also preparing to return to the market to "pre-fund" 2004 requirements for its omnipresent budget deficit and a new RFP (Request For Proposals) was due yesterday (Tuesday). The Ba1/BB/BB rated Republic says it would like to raise up to $500 million either through a new bond, or a re-opening of an existing line and is looking at longer-dated maturities ranging from seven to 25 years. It also specifies that it would like to size two deals at $250 million and $300 million.
What has caused some consternation, however, is its latest cost cutting drive among banks jostling for lead management slots. Such is competition for mandates that the Philippines ranks as the lowest fee payer in the entire region, with fees reaching an all-time low of 13bp last June. This now looks set to be taken one stage further following the RFP's declaration that the Republic is only willing to pay for its own legal counsel and any ratings work.
Printing costs, registration fees, listing costs and any other miscellaneous expenses are to be borne by the lead managers. Typically, the lead would only pay for the underwriter's counsel and a number of bankers consequently argue that it has become completely uneconomical to raise money for the sovereign.
Timing of the transaction may also not be ideal if local speculation about the budget deficit proves to be accurate. According to domestic newspapers, the country has run up a Ps30 billion ($550 million) deficit in September, some Ps18 billion over target. Coming on top of a poor performance in August, this would completely wipe out the Bureau of Internal Revenue's (BIR) hard won out-performance during the first seven months of the year.
However, bankers believe investors remain receptive to paper and believe the Philippines has managed its borrowing programme relatively well so far this year. Its last major benchmark deal was a $750 million offering in July on behalf of Napocor with Citigroup, Deutsche Bank and JPMorgan as lead managers. This paid fees of 17bp.
Ongoing strong demand was also exemplified yesterday by a $70 million tap of Metrobank's recent $130 million subordinated debt offering. Lead manager UBS re-opened the Ba1-rated bank's deal at 99.25% to yield 8.548% or 541bp over Treasuries.
This fell within the bid/offer spread of the outstanding 8.37% 10 non-call five deal due October 2008, which was being quoted at 8.375%-8.875%. It was launched at the very beginning of October on a yield of 8.625% or 564bp over Treasuries.
Observers say the tap originated from reverse enquiry demand out of Europe and momentum generated by Banco de Oro's heavily oversubscribed senior debt offering from last week.
About 40% of the 19 investors who participated in the tap were said to be new to the credit. By geography, the book had a split, which saw 60% placed in Singapore, 20% in Europe and the remaining 20% in the Philippines.
Metrobank has priced at roughly 200bp over the sovereign's interpolated curve and bankers expect Filinvest to come wider yet when its five-year deal is completed at the end of this week. With an indicative coupon around the 9.5% level, the property developer should offer the highest yield of any outstanding corporate deal from the Philippines in the five-year sector.
The current outlyer in this regard is JG Summit, which has a June 2008 transaction yielding about 8.91%. At this level, it is trading about 240bp to 250bp over the sovereign. At the other end of the scale, the Ayala group tends to trade about 60bp over, SM group at about 120bp over and PLDT about 150bp over.
Given its small size and lack of rating, investors would expect Filinvest to pay a premium. The company is raising funds to re-finance a Ps2 billion ($37 million) LTCP maturing next November and also for Ps800 million ($15 million) in 2004 capex.
Likewise, observers conclude that broadcaster ABS-CBN will offer a slight premium to the corporate credit curve because of its ownership by the Lopez group, which has experienced debt restructuring issues with both Benpres and Meralco.
ABS-CBN will be rated and has won some plaudits for its efforts to term out its maturity profile. Last September the group got a majority of its short-term creditors to agree to participate in an exchangeable notes facility, which reduced short-term debt by 89% to Ps426 million and increased long-term debt from Ps2.4 billion to Ps5.39 billion.
