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The Republic of the Philippines tapped the market late last week with its third global peso bond, raising Ps30.8 billion ($750 million). The bond is peso-denominated but settled in US dollars, so investors are exposed to a weakening in the peso’s value.
The Philippines has been trying to lower its proportion of dollar-denominated debt for some time and will use the proceeds of its global peso note to repay expensive dollar and euro-denominated debt, particularly short-dated bonds with higher coupons.
The deal marked the Philippines’ return to the global peso market after an absence of nearly two years. Back in 2011, its global peso bonds had sold off sharply when rates rose onshore. However, the peso has been appreciating this year and rates look set to stay low.
“The Philippines looks like it will keep rates low, in line with the US, and it looks like the central bank could cut rates by 25bp to 50bp,” said one Philippines-based trader.
More recently, the Philippines global peso 2021s have also performed well in secondary markets, and were quoted at 108.5 or a yield of 3.76%. According to the onshore trader, the global peso notes maturing in 2021 broke through the onshore curve about a month ago — indicating that the Philippines could fund itself more cheaply by tapping the global peso market.
The leads went out with initial guidance after lunch on Thursday and closed the books within a few hours, with demand chalking up to $5.8 billion. That morning, the 10-year onshore bond benchmark (PDST-F) was quoted at 5.15%, or 4.12% after deducting withholding taxes.
According to one banker, the Philippines was targeting to price its bonds flat to its onshore curve — to avoid any arbitrage opportunities for offshore investors. Hence, the leads started out with an initial guidance at the 4.1% area.
The bonds priced at 3.9%, at the tight end of the 3.9% to 4% final guidance — and about 22bp inside the onshore yield curve, after deducting the 20% withholding taxes that foreign investors are subject to when they buy onshore bonds.
The note attracted interest-rate buyers rather than the usual fixed-income investors and attracted balanced demand, with US investors allocated 41%, European investors 30% and Asian investors 29%. Fund managers were allocated 90%, banks and central banks 9% and private banks 1%.
At 3.9%, the coupon was lower than the 4.95% the Philippines paid when it tapped the market with a 10-year global peso note back in 2010.
The 2022s performed in secondary markets and were quoted at 101, or a yield of 3.8%. The Philippine 10-year onshore bond benchmark rallied slightly and was quoted at 5.08% on Friday morning.
Concurrently with its bond issue, the Philippines announced its liability management exercise on Thursday. The Philippines plans to spend up to $1.5 billion buying back US dollar and euro bonds, and the invitation for investors to submit offers to sell their bonds expires on November 15.
Credit Suisse, Deutsche Bank and HSBC were joint global coordinators and bookrunners. Citi, Goldman Sachs, J.P. Morgan, Morgan Stanley, Standard Chartered and UBS were joint bookrunners.
