Filipino borrowers remain waiting in the wings

The anticipated onset of international dollar bonds from Philippines does not look likely to materialise, with PLDT debating whether to hold out for a better market and Napocor turning back to the government for funds.

The market had been expecting that PLDT (Philippines Long Distance Telephone Company) would kick-start the autumn pipeline with its $500 million high yield bond via joint leads Credit Suisse First Boston and HSBC. However, while the 10-year deal is said to be ready to go, the two leads are believed to have decided to hold off for at least another week before making a final decision whether to proceed with roadshows.

Most believe that this decision makes sense. Filipino spreads remain high relative to pre-summer levels and have been fairly range-bound over the past few weeks despite the removal of the threatened default by Argentina, which sent all emerging markets spreads wider in early July. "For secondary market flows, this week has probably been the quietest of the summer," one banker comments. "It won't become clear how quickly Filipino spreads are likely to tighten until US investors return in force next week. Local investors are waiting for guidance from the wider market."

As a result, PLDT's benchmark April 2009 bond is currently trading at a bid/offer spread of 741bp/708bp over Treasuries against a 658bp/627bp level when the mandate was first awarded in late May. At these levels, the BB+/Ba2 rated credit is trading about 166bp wider than the Republic, whose comparable March 2010 issue is bid at 575bp over versus 476bp over in late May. This also puts it at the wider end of its traditional trading range of about 125bp to 175bp over the Republic.

Observers further say that while the company's heavy debt load has long weighed on its spread performance, there is no immediate rush to launch a deal that has been designed to term out its maturity profile. According to recent research published by HSBC, borrowings at the group level stood at Ps178 billion ($3.48 billion) as of end June 2001, of which the parent accounted for Ps147 billion ($2.88 billion).

This level, nevertheless, represents a 9% decrease from one year ago and is largely attributable to the completion of Piltel's debt restructuring on June 4 and the company's de-consolidation. "As a result, gross gearing improved from 227% in 1H00 to 204% in 1H01," HSBC concludes.

The Republic plans its return

If PLDT decides to wait a while longer, bankers expect that the Republic itself will be the next issuer to tap the international dollar and yen markets, with tentative plans for another small scale dollar borrowing in early September and a new benchmark Yen deal later in the month.

For most of the year, the government's abrupt about-turns and reliance on a series of small scale deals have unsettled those who believe that the country should return to the international markets with a large benchmark deal and fresh roadshows. However, while the many and often conflicting public pronouncements have been confusing, the end result has benefited a credit that has developed a reputation for mishandling its public deals.

As one banker puts it, "They have used a number of lead managers this year and not let themselves become beholden to just one or two banks. The series of deals have also created a groundswell of support that can be capitalised upon with a larger deal when market conditions improve."

With competition to win mandates becoming increasingly fierce, the Republic has also resorted to seeking hard underwritten deals from bidding banks. This led CSFB to win a $500 million 10 year SEC-registered global at 510bp over Treasuries on July 8, the very day that the Republic's spreads popped on the back of Argentina's woes.

With the bank unable to execute the deal at these levels, the baton passed to HSBC which is said to have won the mandate for a $200 million five year eurobond at 431bp nearly two weeks ago, but quickly backed down when it became clear that it would take a week to secure Monetary Board approval, by which time the markets could have moved against the lead. A similar fate is then said to have faced Deutsche Bank, which is believed to have matched HSBC's bid, but also could not execute.

Observers now believe that the government will secure Monetary Board approval and then get banks to bid on a deal that can be executed immediately. "Given the razor thin pricing the government is looking for, they are not going to be able to complete a deal unless they can get it out into the market within 24 hours of the mandate," one banker argues.

In the meantime, the Republic is also soliciting bids for up to Y50 billion ($400 million) in funding, sending out an RFP (Request for Proposals) at the beginning of August. Banks have until the end of the month to submit their ideas for structures and maturities out to 10 years, with a decision expected in early September, followed by launch later the same month after President Arroyo's inaugural visit to Tokyo.

Should the country opt for a stand-alone deal, specialists believe that it will not be able to extend beyond the five-year mark, since Japan's core retail investor base rarely goes beyond this maturity for higher yielding credits. Last July, for example, the Republic attempted to raise up to Y70 billion with twin five and seven year tranches, but was forced to back down after demand evaporated and it ended up with a Y35 billion five year deal that priced at par with a coupon of 3.2% and launch yield of 209bp over yen-libor.

However, should it opt for five years, bankers believe that its paper be well received. "From Asia, we've seen a number of investment grade rated deals from Korea that have been very successful and from Latin America, a steady supply of paper that recently culminated in Brazil's jumbo Y200 billion ($1.8 billion) issue, completed at a time when virtually all other markets were closed to the country," a banker remarks. "There is an obvious gap for a sub-investment grade issue from Asia and the Philippines fits the bill."

Should the Republic want to extend its maturity profile, on the other hand, bankers believe that it may consider issuing paper backed by a Japanese government-agency guarantee. Japan has indicated that it is keen to increase ODA funding to the Philippines and this might prompt a new JBIC-backed deal.

Previously, PNOC-EDC (Philippines National Oil Corp - Energy Development Corp) has made use of the structure, launching a Y22 billion shibosai in June 2000. With a 10-year maturity, the offering had a JBIC guarantee for the last five years of coupon payments and principal risk, leading to pricing of 40bp over yen-libor, equating to a yield of 2.37%.

All the Republic's forthcoming deals will be used to pre-fund a $2.7 billion offshore borrowing quota for 2002, triple this year's level. Finance officials have said that they remain keen to source funds from overseas to prevent further backing up of domestic interest rates, now about 300bp above US dollar levels.

Napocor to receive government funding

There has been some surprise, therefore, at news that Napocor is not likely to tap the international debt markets, but will let the government raise funds for it through a domestic treasury auction. Bankers had been expecting the soon-to-be-privatised group to mandate a $300 million to $400 million government-guaranteed deal to fund working capital and meet its debt obligations.

Lehman Brothers had been hotly tipped to win the mandate, since the group was said to have liked its proposal for a dollar/yen five year dual currency bond that could have reduced its upfront borrowing costs to about 200bp over Libor.

Now, however, it is believed that the government will raise the funds in the domestic market and on-lend proceeds to Napocor to bridge it over until October. “It does make sense in one way,” a banker comments. “Why take the dollar risk, when it actually needs funds in Pesos to pay its suppliers?”

So far this year, bankers say that they have received five RFP’s from the group. Having abandoned plans for term financing at the insistence of the Department of Finance, the group asked banks to bid on a $200 million one-year bridge in July and then a $50 million one-year bridge in August. In the end, the Republic lent the group $50 million to meet debt re-payments due by the end of the month.

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