BDO defies Philippines CDS with tight bond

The Philippine lender returns to dollar bonds after five years off, telling FinanceAsia it wants to get ahead of the US rate hike.

After ICTSI closed a tender offer and new bond last week, the Philippine company's CFO told FinanceAsia that a major driver of the deal was his fear that US interest rates were on their way up. Philippine lender BDO Unibank came out with its own bond this week — and the bank's treasurer admitted the same consideration drove the timing of the deal.

"We want to seize the opportunity before the US Federal Reserve raises rates in December," Pedro Florescio, the Manila-based treasurer of BDO Unibank, told FinanceAsia in a phone interview.

The two issuers were responding to the increasing consensus that the Federal Reserve would hike interest rates in December, a view supported by a series of strong economic data releases and the hawkish-sounding minutes of the Fed's last meeting.

This is not simply the fear that the underlying benchmark — that is, US Treasuries — will increase but that credit spreads could also increase, too, as demand flows to the US market. Florescio pointed to a recent widening in the Philippines credit default as an example of one risk factor. According to market data, the country's five year CDS price was trading at 120bp on Monday, up from around 95bp earlier this year.

In this context, it should come as little surprise that some Philippine issuers want to tap the market. But the strong response that BDO got for its bond should still turn heads, especially given the ballooning CDS price.

The bank priced a $300 million five year bond on Monday night, completing the deal without launching any official roadshow. The bond drew around $600 million of orders and — in a rarity for Philippine issues — bankers said only a tiny amount of that came from domestic investors.

The rapid execution and diversified demand is one thing, but more impressive is the fact that BDO got away with the lowest coupon ever paid by a Philippine issuer in the dollar bond market, said a banker familiar with the deal.

BDO Unibank will use the proceeds from the new bond to refinance its outstanding $300 million deal maturing in February 2017, the company said a statement with the Philippines Stock Exchange.

In secondary trading on Tuesday, the $300 million October 2021 bond was trading at a cash price of 99.974% to yield 2.631%, slightly lower than its reoffer price at 99.977%.

Standard Chartered and UBS were the bookrunners and initially pitched investors with pricing of “the 155bp area” over Treasuries. But they ended up pricing at a Treasury spread of 135bp, or a 2.63% coupon.

The final order book closed at $600 million after orders from 70 accounts. Asian investors took 87% of the deal, while Europeans accounted for 13%. By investor type, fund managers represented 45%, banks 15% and insurance funds and agencies 12%. The remaining 28% went to private banks and others.







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