Equitable-PCI, the Philippines' third largest bank by assets, completed a $130 million 10 non call five, lower tier 2 debt issue on Friday via bookrunner UBS Warburg and joint lead Deutsche Bank.
The deal represents the first from the Republic since its rating downgrade and while underlying market conditions are currently strong for most Asian credits, market participants do not believe this necessarily holds true for paper from Philippines, where the credit outlook remains clouded.
Equitable-PCI, nevertheless, spotted a window to secure the most cost effective pricing it could and priced at 98.733% on a coupon of 9.375% to yield 9.7% or 718bp over Treasuries. At this level it came at a 293bp premium to the sovereign curve, since the Republic has an April 2008 issue trading at 6.77% bid, or 425bp at the time of pricing.
The Ba1-rated deal's nearest comparable, however, is a $125 million deal by the country's largest bank, Metrobank, which completed a 10 non call five offering via UBSW in December. This was trading at an 8.7% yield on Friday and taking into account 30bp for the maturity differential, this means that Equitable-PCI has come at 70bp premium to its larger competitor.
Market participants note that the differential between the two is extremely wide and especially in light of the 105bp premium that Metrobank paid to the sovereign curve for its own lower tier 2 deal. But, the transaction's reception seems less surprising in the light of Equitable's credit history and Metrobank's secondary market trading record.
Metrobank originally priced its deal at 99.50% on a coupon of 8.5% to yield 8.625% or 578bp over Treasuries. At the time, the Republic's 2008 issue was yielding 7.59%. This means Metrobank now stands 12.5bp tighter than launch, compared to 82bp for the Republic.
Bankers say the main problem for Metrobank was the launch of a difficult transaction for the Republic only a few days after it priced, which killed the deal before it had a chance to settle. At its cheapest, it is said to have widened out to 9.5%, but started to come in about two weeks ago, giving Equitable a good platform to launch a deal.
Similar to Metrobank, which attracted 49 investors, there were said to be 50 in Equitable-PCI's book. By geography the book split 50% Singapore, 32% Hong Kong, 9% Europe, 7% Philippines and 2% Indonesia. By investor type, retail took 64%, asset managers 24%, banks 8%, insurance companies 2% and corporates 2%.
Equitable-PCI's distribution splits show a much higher private banking component than Metrobank's, which placed 38% with private banks, 27% banks, 24% asset managers, 10% insurance funds and 1% corporates. The Philippines also provided a higher component of Metrobank's deal, with 36% heading back onshore, compared to 44% to the rest of Asia and 20% to Europe.
Observers say that Equitable-PCI's coupon above 9% made it very attractive to retail investors, most of which are clustered in Singapore and Hong Kong. Where Philippines' demand is concerned, country specialists suggest two main reasons why it was relatively weak.
Firstly, the deal has a 100% risk weighting so that the country's commercial banks, traditionally big players in the sovereign's dollar deals, would not be that interested. Secondly, Equitable-PCI has had a 'colourful' credit history, making it less appealing to credit sensitive private banking clients with long memories of the bank's previous difficulties.
At the height of the Estrada impeachment trial in 1999/2000, Equitable-PCI suffered a Ps90 billion ($1.72 billion) run on deposits after allegations that the former President had been laundering billions of Pesos through the Go family-owned bank. The Bangko Sentral ng Pilipino (BSP) subsequently had to step in with a Ps30 billion credit line to save it from collapse.
The central bank's intervention may, however, have been one of the reasons why Moody's was persuaded to assign both Metrobank and Equitable-PCI sovereign ceiling ratings for their subordinated debt issues, when normally a one or two notch differential to senior debt would be expected.
Analysts say that Equitable-PCI's CAR will rise back above 10% as a result of the new deal. The bank currently has an asset base of roughly Ps260 billion and posted net profits of Ps727 million for the 2002 Financial Year, up an impressive 419% on 2001. Most of the improvement has been attributed to rising non-interest income, although gross loans were also up 6%. Likewise NPLs declined from 25.7% to 18.8% over the same period.
Yet as ING analyst Damien Woods concludes, "Generally, banks have not been aggressive enough in dealing with their NPLs. We would also like to see improved provisioning."
According to UBSW estimates, Equitable-PCI's cover improved from 45% at the end of 2001 to about 58% at the end of 2002.
