The Republic of the Philippines raised $1.05 billion last night (Thursday) after pricing an increased tap of its January 2014 bond and surprising the market with a re-opening of its March 2025 bond. Both deals caught a strong wave of buying interest, developed good momentum and appeared to be smoothly executed.
Yet it is likely to be the fees, which will linger in the market's memory, since both taps set new record lows for a public bond deal out of Asia. Fees for the 2025 tap were set at 10bp and at a mere 6bp for the 2014 tap. This marks half the level JPMorgan received for a Philippines sovereign deal just over a year ago, when its 13bp remuneration was considered an outrageously unhealthy new precedent.
Lead managers for the two taps were HSBC, Morgan Stanley and UBS. The three had been mandated the previous day and set out with expectations of launching a $500 million tap of the Republic's 2014 bond. At New York's open Thursday, the three then announced the Republic would tap its 2025 bond for a further $250 million.
At pricing, the 2014 tap was upsized to $750 million and priced at 99.50% to yield 8.32% or 386bp over Treasuries. Its existing 8.25% bond was bid at 99.875%.
The 2025 tap was also increased marginally to $300 million and priced at 112.25% to yield 9.29% or 399bp over Treasuries. Its existing 10.63% bond was trading at 112.875%.
The order book for the 2014 tap is said to have closed three-and-a-half times covered with participation from 129 accounts. By geography, the book saw $800 million demand from Asia, $570 million from the US and $280 million from Europe. There were also a handful of jumbo $150 million plus orders and about 40% of the Asian demand was said to come from the Philippines.
The order book for the 2025 tap closed two-and-a-half times covered and saw participation from 60 accounts. By geography, the book saw $350 million from the US, $280 million from Europe and $150 million from Asia. About seven orders were for more than $50 million.
The 2025 was said to be the more challenging of the two since it is usually difficult to get investors to accept such a high cash price. However, scarce supply of long-dated Asian paper proved to be the swing factor at a time when investors are looking for duration.
From the Philippines point of view, the tap of the longer-dated bond also made sense given that the differential between its long and intermediate curve is currently at a historically tight level. Veering from 100bp to 150bp, the pick-up is currently around the 100bp level.
Both bonds are trading around their three month averages, with the 2014 hitting 456bp at its widest and 354bp at its tightest, while the 2025 has traded as wide as 483bp and as tight as 374bp.
The surprise two notch upgrade of Russia's sovereign credit rating has prompted a rally across most emerging market paper over the past week. However, it has not yet driven Philippines spread performance.
Some analysts note that although the Philippines has under-performed EMG spread tightening, its spreads have been relatively stable and unaffected by bad news regarding the budget deficit. Local newspapers, for example, are reporting a Ps18 billion overshoot of the budget deficit target in September, prompting speculation of pump-priming measures by the Arroyo government ahead of presidential elections next May.
But some investors believe spreads have been weighed down by supply concerns and may now be hitting an inflexion point ahead of tightening. The government certainly flagged its borrowing intentions for the remainder of the year very clearly and successful completion of the two taps should end the programme for the year on a high note.
