An increased Eu500 million ($442 million) five-year deal was priced in London last night (Wednesday), with over 60% of investors said to be new to the credit. Led by Deutsche Bank, Salomon Smith Barney and UBS Warburg, the deal was increased from an original target of Eu250 million, with pricing coming at 99.865% on a coupon of 9.375% to yield 9.41%. In spread terms, this equates to 525bp over Bunds and 500bp over euribor, the tight end of the final pre-marketed range.
JPMorgan and Morgan Stanley were co-managers, though were not allocated bonds.
A total of just over 100 investors participated in a book that closed at the Eu800 million level, with final allocations split 60% Europe, 20% US and 20% Asia. Of the European book, UK investors represented 38%, Germany 17%, Italy 17%, Switzerland 8%, France 5%, Benelux 4% and others (including Spain, Austria and Scandinavia) 11%.
By investor type, asset managers accounted for 50%, pension and insurance funds 20%, banks 15% and retail 15%. From the RepublicÆs point of view, observers comment that one of the most pleasing aspects of the transaction was the number of real money accounts relative to asset swappers.
As one puts it, "The lead managers worked very hard to keep arbitrage-driven accounts out. The Philippines wants to create a euro benchmark that may trade above or through its dollar curve, but ultimately isn't influenced by it. Coming to this market was a strategic decision and the borrower was always well aware that there would be an entry price to achieve its end goal of diversifying away from the dollar market.
"Europe represents the second largest block of investable cash and for a country which runs a budget deficit, it's important to have access to it and develop a quality franchise," he adds. "It was therefore very pleasing to see such a wide spread of pan European asset managers and private banking funds."
Observers add that in comparison to the Republic's debut Eu350 million deal of April 1999, the BB+/Ba1 credit appears to have been able to tap a new source of demand. "The first deal was very difficult and ended up as a London-centric offering, with a flavour of Swiss retail," one banker comments. "There was virtually no interest from Italy or Germany, whereas this deal has attracted significant interest from both countries."
Most of the private banking funds were said to have put in small orders of $1 million to $2 million, having been fairly dormant investors in EMG euro paper over the past few months. Renewed activity was attributed to a re-weighting from Turkey and latterly Argentina following its recent difficulties.
In terms of pricing benchmarks, the main reference point was the Republic's Eu350 million 8% September 2004 transaction, bid at 477bp over mid swaps at the time of pricing. This means that the Republic paid an additional 23bp to achieve an extra two years duration and since there is said to be 30bp on the curve, bankers believe that it was a fair trade.
However, the existing euro deal provides a relatively poor benchmark since its short tenor has led much of the paper to be asset swapped resulting in a wide bid/offer spread of up to 1% in price terms.
So too, bankers argue that the Republic's 2006 dollar put bond does not represent a good benchmark since it is very technical. "Much of this paper is held onshore and there is a very tight squeeze at the moment," says one banker.
Outside observers, who argue that pricing was very wide relative to dollar paper point out that the 2006 put bond is currently bid at 412bp over in Libor terms, a roughly 100bp differential to the pricing of the new euro offering. This was the almost exactly the same differential the Republic had to pay in 1999 in a debut deal largely bought by dollar investors on a relative value basis.
Against euro-denominated comparables, the Republic's pricing also looks very wide. Only a few days ago, B+/Ba3 rated Bulgaria priced an Eu150 million five year and five month deal at 350bp over euribor, while BB+/Ba1 rated Slovakia, which has the same rating as the Philippines, has a much longer 2010 bond trading at 234bp over euribor.
From outside Europe, B+/B1 rated Lebanon has an October 2006 bond trading at 392bp over euribor and from Latin America, B+/B2 rated Brazil has a November 2006 trading on a yield of 9.74%.
But as the Philippines' supporters respond there are specific reasons why each of the above credits will always trade much tighter levels than the Philippines despite considerably lower ratings. Bulgaria and Slovakia, for example, are regarded as European convergence plays, while Lebanon appeals to its own domestic investor base and Latin America benefits from heavy euro issuance which has deepened credit knowledge and a bedrock of Latin American private banking money booked out of Switzerland and Germany.
Yet critics are likely to argue that while the Philippines got the best pricing it could, why continue targeting an investor base for which there appears to be no natural demand for its paper? In pure pricing terms, euros is clearly the least attractive of all the G3 currencies and the point has been underscored by the success this week of its Y50 billion shibosai led by Daiwa, Nomura and Fuji. The 10-year deal, which is guaranteed by Nexi, was marketed with a 1.88% coupon to yield about 130bp on a Libor basis, or about 240bp all-in after the cost of the guarantee is taken into consideration.
Were the Philippines to have issued in dollars, it would have also benefited from the support of its own domestic investor base, whose constant bid keeps shorter-term maturities on the Philippines curve at tight levels relative to longer-term paper held by US investors. Again, however, supporters conclude that the Philippines government has been very clear about its objectives.
"It is taking a medium-term view," says one. "The governments regards Europe as a work in progress and wants to have euros both from a reserves perspective and as a funding source. It is not a market that will be accessed on a regular basis, but it is one thatÆs viewed as a fundamental part of the overall funding programme."
Pricing was further complicated by volatility in the Treasury market, with last week's 60bp back-up in yields resulting in a comparable contraction in Philippines spreads, since most of its bonds trade on a price basis and these levels remained fairly constant throughout. As Treasury yields fell again this week, Philippines' spreads were marked out about 15bp in Asia on the day of pricing.
In sizing the deal at Eu500 million, lead bankers also believe they have achieved the right balance between creating a liquid benchmark and leaving enough unsatisfied demand to flow through and support secondary market trading. They further add, that because investors started to show resistance at the 500bp mark, it was decided not to try and tighten pricing further.
Unlike the 1999 deal, the new offering was also given 144a registration to encourage interest from US accounts that have little opportunity to buy dollar paper this year, since the Republic and central bank have stuck to small-sized deals, most of which have been placed in Asia.
For once, Finance Secretary Jose Camacho also had some good news to tell investors about the budget deficit during roadshow presentations. For the January to October period, the Republic ran a budget deficit of Ps133.3 billion ($2.56 billion) against projections of Rs137.7 billion.
Proceeds are being on-lent to Napocor.
