The $500 million seven-year deal led by Bear Stearns with JPMorgan as joint-lead has been maligned by just about every single Asian DCM specialist. All believe that it will prove to be a costly waste of time and end up saying more about the way mandates should not be awarded in Asia.
The deal carries an unusual sovereign guarantee as well as political risk insurance (PRI) and is expected to price either Thursday or Friday of next week after a week's roadshows undertaken by two teams, one of which will be led by national Treasurer Sergio Edeza. Indicative price talk is 50bp through the sovereign curve, although Philippines specialists believe that Napocor will be lucky to come flat to the sovereign despite the fact that its deal has secured a one notch higher rating of BBB-/Baa3.
Detractors' main argument is that investors will not want to buy a highly illiquid piece of paper that does not carry comprehensive enough guarantees to justify pricing much above the sovereign curve. This is likely to be compounded by the lead's small-scale operations the region, raising questions about its commitment to secondary market support.
In its favour, supporters counter that the investment grade rating will enable the group to access a number of US accounts legally constrained from buying sub-investment grade paper. In a year which promises to see substantial issuance from the Republic and related entities, it may be important to throw the net wide as possible in order keep existing credit lines free.
The second issue is one of cost and whether the huge amount of work involved in getting the deal off the ground will be justified by pricing even at the most aggressive end of the indicative range. The main cost incurred by the deal is the 35bp PRI fee (not 40bp as previously reported) from Sovereign Risk Ltd, an affiliate of XL Insurance.
The PRI guarantee covers three coupon payments on a rolling basis and is enough to persuade the rating agencies to assign the sovereign's local rather than foreign currency rating. This is based on the principle of convertibility and transferability - an issuer's inability to either exchange pesos for dollars, or its inability to transfer dollars offshore to pay investors.
"The rating agencies take the view that these two kinds of non-payment event do not usually last more than six months to a year and that there is consequently minimal risk of default," one banker explains. "If, however, the situation is not resolved within an 18 month period, then the issue does go into default."
On top of this there is also a sovereign guarantee, although in a move related to the PRI, it differs from past guarantees in that it only guarantees to repay investors in pesos rather than dollars. Investors are also further protected by a reserve account, which will hold one interest payment.
Is this enough to overcome the dealÆs liquidity limitations? Most do not think so.
"The more you dig into it, the more you have to wonder just what kind of animal this deal is," says one banker? "For the Philippines, the real danger is whether it messes up a sovereign curve which the Department of Finance and Central Bank have been working hard on over the past year and are particularly proud of at the moment."
Others believe that the whole concept is wrong and that PRI offers little benefit when it is applied to a bankrupt entity such as Napocor. As one puts it, "Issuers with a reasonably clean balance sheet and a story to tell are the usual buyers of RPI, because the fudge allows them to tell their own story without being hamstrung by sovereign risk."
The most recent application of the structure has been in Brazil where the state-owned development bank BNDES used PRI to gain investment grade status for a bond deal late last year. But Brazil has a much lower BB-/B1 rating than the Philippines BB+/Ba1 and some see little point using the guarantee when it only bumps the rating up by a notch.
At an indicative spread of 50bp through the sovereign curve, Napocor will save a minimum of 15bp from using PRI depending on how much the Republic has been charging it for on-lending money after borrowing directly in the sovereign name. When it has offered full sovereign re-payment guarantees in the past to state-owned entities intending to issue on a stand-alone basis, it has normally charged 1%.
At yesterday's close of Asian trading, the Republic of the Philippines 2017 put 2012 was trading at a bid/offer spread of 453bp/449bp, while its benchmark 2010 was quoted at 425bp/410bp and its 2025 issue at 535bp/520bp.
