Back to back dollar bond issues for PLDT and Globe

The Philippines'' two dominant telcos are simultaneously planning to access the international bond markets within the next month.

Both operators are hoping to lock in cost-effective funding by riding on the back of phenomenal secondary market spread performance since the beginning of the year. PLDT in particular, has been the star turn of the Asian credit markets. The Ba3/BB- rated credit has seen its benchmark April 2009 transaction tighten from a spread of 1,000bp over Treasuries to 580bp over and yield contract from 15% to 11%.

A $150 million to $175 million issue for Globe Telecom has already been well flagged and roadshows start on Monday under the sole lead of Salomon Smith Barney. Similar to the group's debut $220 million issue of August 1999, a ten non call five offering is expected, although management are said to remain flexible on this point subject to investor feedback.

Having become one of investors' favourite emerging market plays in recent years, BB/Ba3-rated Globe is expected to be lapped up by accounts looking for that rare combination of yield and a stable credit profile. For the sake of both deals, it also makes a lot sense that Globe comes first, since a well-received offering will set a positive platform for the more problematic PLDT to exploit.

PLDT is hoping to return to the market with $350 million to $500 million liability management exercise having previously shelved a $250 million cash tender and bond offering after September 11. The original deal was to have been led by Credit Suisse First Boston and HSBC, although the latter has now moved out of the frame due to a conflict of interest.

In its place, Morgan Stanley has moved forward instead, having won the company over at the beginning of the year with a proposal for a structured bond issue with warrants. At a time when the company's spreads were still trading at historically wide levels, the idea of a warrants kicker seemed to make sense.

It was based on a previously successful deal completed by the investment bank for APP China in March 2000. This comprised a $403 million 10-year issue with an issue price of 86.866%, a coupon of 14% and yield of 16.75%. On top of this were 403,000 detachable warrants with a strike price of 110% and equivalent to 1.5% of the company's share capital.

Within the last day or two, however, PLDT is said to have dropped the idea of including warrants in the belief that they are no longer necessary. It is now debating whether to go ahead with a straight bond issue, or revert to its initial plan for a cash tender and bond offering. Either way, the aim is to reduce the company's debt load and forestall a liquidity crunch.

Roadshows are expected to start at the beginning of April under the joint lead of CSFB and Morgan Stanley. The company is likely to seek a minimum of $350 million, but will take out a full $500 million if it can.

Should it opt for a straight bond issue, proceeds will be used to pay down debt as it comes due this year. On a non-consolidated basis, analysts calculate that the group has $1.307 billion maturing between 2002 and 2004 and on a consolidated basis, $1.610 billion.

Of the non-consolidated amount, $108 million falls due during the first half of 2002 and $212 million during the latter half of the year. Peak year for re-payment is 2003 when $584 million needs to be re-financed or re-paid, followed by 2004 when $400 million comes due.

Most houses now believe that PLDT will avoid a liquidity crunch and after KfW came forward with a $149 million loan just over a month ago, many have put the company back on their buy lists again. Ironically, spreads started to move in rapidly just as Moody's downgraded the company from Ba2 to Ba3 and put it on review for further downgrade due to, "concerns over PLDT's ability to service its long term debt, especially in light of its exposure to foreign currency movements."

At its peak in mid to late October, the spread on PLDT's 2009 bond hit the 1,050bp mark and pretty much stayed there until Christmas. As investors started honing in on the company's balance sheet problems, PLDT's bonds became completely de-coupled from their historical trading relationship as a leveraged sovereign play.

Traditionally PLDT trades at a 125bp to 175bp premium to the sovereign. Currently, the 2009 bond stands at a 265bp premium to the Republic of the Philippines' recent March 2009 bond, which was bid at 327bp over Treasuries at Asia's close yesterday (Wednesday).

When it proposed its cash tender, the company offered a roughly three point pick up for its June 2003 bond and a four-and-a-half point pick up for its June 2004 bond. To avoid potential volatility in the Treasury markets, investors were offered a fixed spread over Treasuries. These were fixed at 350bp for the 2003 bond then bid at 580bp and 400bp for the 2004 bond then bid at 636bp over.

At yesterday's close the 2003 bond was bid at 98.33% on a bid/offer spread of 634bp/495bp and the 2004 bond at 99.125% on a bid/offer spread of 753bp/662bp.

Globe, by contrast, saw its 13% August 2009 (call 2004) issue close yesterday on a bid price of 115% to yield 8.32% or a Treasury spread of 479bp/416bp. At this level, it stands at a 152bp premium to the sovereign.

Proceeds from its new issue are being used to fund $602 million in planned capex for 2002. Of the total, $350 million has been carried over from last year. Analysts say that the group has ample room to fund most of the amount through the debt markets, however, as it is still within its covenant limits - a debt to equity ratio of no more than 2:1 and a maximum debt to EBITDA ratio of four times.

At the end of 2001, the company had $900 million of debt outstanding of which 60% was denominated in US dollars.

Both Globe and PLDT have also featured highly FinanceAsia's Best Companies survey for 2002. A poll of 331 institutional investors and equity analysts conducted over the past month has revealed that Globe CFO Delfin Gonzales is viewed as the Philippines' most impressive CFO, with his counterpart at PLDT, Chris Young, voted runner up.

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