After a difficult book-build, plagued by controversy over the calculation of current account data, the Philippines managed to salvage some measure of success by the time it priced a $500 million bond yesterday (Wednesday).
Conscious that it has to raise close to $4 billion from the international markets this year, the sovereign knew it was vital to make sure its first deal set the right tone for the many that will follow. Market participants are, therefore, likely to conclude that capping the deal at $500 million was an extremely sensible move even though the leads had been able to build an order book of $1.15 billion. And while a number of non-syndicate bankers were critical of "market noise" about the possibility of a $750 million transaction, for once government officials were not held to blame for shooting themselves in the foot by talking up the issue size and spooking investors ahead of actually building a book.
Under the lead management of Credit Suisse First Boston, JPMorgan and Morgan Stanley, the sovereign re-opened its 9% February 2013 bond adding a further $500 million line of paper and bringing the overall size up to the $1 billion mark. Pricing came at 96.75% to yield 9.509% or 553bp over Treasuries. Similar to the original bond issue in November, fees totaled 22bp. Co-managers were Deutsche Bank and HSBC.
Pricing at this level represented a tight 2bp premium to secondary market levels. In the context of the bond's trading pattern over the past few days, however, it was more disappointing, as the bond had dropped from a trading level of 99% and a bid yield and spread level of 9.15% and 512bp at Monday's open in Asia. In yield terms, this means the re-opening priced at a roughly 38bp premium to where the bond was trading only two days ago.
Bankers were naturally keen to emphasize that there was little allocation to trading accounts, which are likely to flip the bonds. With total participation by 130 investors, allocations were split 42% US, 35% Asia and 23% Europe. This compares to a total of 45 investors in the similarly sized November deal, which had an allocation split of 46% Asia, 36% US and 18% Europe.
One of the key differences between the two deals was the greater involvement of US investors this time round and bankers say at least half the book was new to the deal. "A lot of the bigger US funds didn't participate in November, but have come into this deal because they felt the time was right," one comments. "They believe the bad economic news is now priced into spreads and were also comfortable the deal would be tightly controlled and perform in the secondary market."
The November offering is said to have never traded above its re-offer price. Indeed, since the Philippines' $300 million tap of its March 2009 bond last June, the sovereign's international deals have had to battle a rapidly deteriorating credit perception and been further hindered by a series of mishaps - the announcement of a record overshoot of the budget deficit on the day the March 2009 was re-opened and the need to counter misconceptions that the Finance Secretary had resigned when the November issue was launched. The only exception has been a $500 million deal led by ING in September, which had a strong domestic backstop bid.
The strategy with the latest deal mirrors that of 2002 and 1999 when the government took advantage of plentiful liquidity and the traditional portfolio re-weighting, which takes place in early January, to catch a wave of positive sentiment and complete the region's first transactions of the year. In 2002, for example, it raised $750 million via CSFB and Morgan Stanley and in 1999, $1 billion via JPMorgan and Morgan Stanley.
Few would argue that the current transaction has been able to come anywhere close to emulating these past successes. What its reception does serve to re-emphasize is the sovereign's need to continue adopting an extremely careful approach towards dispelling the many concerns hanging over its credit.
Moody's, however, provided some cheer after Asia's close yesterday, re-affirming the stable outlook on the sovereign's Ba1 foreign currency rating. This was especially important as it had been reported earlier in the week that the agency was concerned the Philippines was not running a current account surplus but a deficit because it had been consistently under-reporting the true level of imports. This Moody's report was said to have followed one compiled late last year by the IMF and had an immediate knee-jerk effect on spreads.
But in its statement, the agency said that, "revisions in estimates of the current account balance do not reflect weakness in the balance of payments as official foreign reserves have been boosted in recent years and remain in a relatively sound position in relation to near and long-term debt service obligations.
"The status of the foreign currency rating," it added, "will depend on the ability of the Philippines to maintain the strength of its external payments position."
However, both Standard & Poor's and Fitch have the Philippines and negative outlook and a growing number of analysts believe a downgrade from one of the agencies is likely. As UBS Warburg analyst Scott Wilson writes, "The assumed current account surplus was a critical factor cited by the rating agencies to justify the BB+/Ba1 sovereign rating in recent years. The absence of a current account surplus raises the country's vulnerability to external shock and makes fiscal consolidation even more critical in our view."
