Global peso bond sets new benchmark for Asia, says Citi

What are the main trends that will drive issuance from the Philippines in the capital markets in the next six months or so?
Firstly, local market conditions are very supportive. In particular, interest rates remain very low and onshore liquidity is at an all-time high. The banking market has low loan-to-deposit ratios in both pesos and US dollars, which supports both onshore and offshore issuance and demand, often driving down pricing for Philippine issues. Also, tenors have extended out to 10 years. We've seen high-grade and even high-yield names attract significant liquidity at tight pricing, which is attractive. It's been a long time since issuers have been able to access such low-cost term funding across both peso and US dollar formats.

Secondly, the successful elections and consolidation of the Aquino government has established a benign political environment. Before the elections there was a 'wait and see' attitude toward fundraising in the first half of the year. Now, issuers feel confident to move forward with their investment and growth plans. These plans include raising funds to support upcoming projects, hence the willingness to tap the markets through both equity and debt.

Thirdly, we are seeing a resurgence of interest from offshore equity investors in the Philippine market. The Philippines stock exchange has hit renewed highs since the start of the global financial crisis, which is renewing appetite by sponsors to reconsider a listing as an exit for private equity investments. Several IPOs and follow-ons are planned for the fourth quarter to take advantage of the market window.

Last but not least, the Republic is building on its track record as an innovative issuer. It is a benchmark issuer in Asia and its recent peso global bond, which was the first local currency global issue from an Asian sovereign, raised cost-effective financing via a $1 billion equivalent 10-year with a 4.95% coupon [Citi, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC and J.P. Morgan were joint bookrunners for the transaction, with Citi and Deutsche Bank acting as global coordinators]. This global sovereign peso bond could open up a new market for corporate issuers in the Philippines, as well as tease out more Asian sovereigns to issue similar bonds.

In the past few years the peso bond market has hit highs, with 2009 being a record issuance year. There is a preference by many issuers to raise local currency to avoid FX risk. This approach has been heavily supported by onshore retail investors through the consumer banks and trusts. Citi opened its trust business last year and we have seen strong demand for peso bond issuance from our consumer banking and Citigold client bases.

What are the opportunities for M&A in the Philippines -- do you expect inbound or outbound to dominate?
We have started to see international investors explore the Philippines again, outside the debt and equity markets. The country has suffered in recent years from a lack of foreign direct investment, so it's refreshing to field inward inquiries again. We're seeing [interest] in several sectors from private equity to multinationals to infrastructure players. This is an encouraging sign as previous visitors focused mainly on the BPO or outsourcing opportunities in the country. New inquiries are much more diversified. My view is they are attracted to the high growth environment (7.9% in the second quarter of 2010), the way the economy withstood the financial crisis, the peaceful elections and the government's stated objective to spur private sector participation in the country's development.

Are there also companies looking to expand abroad?
Yes, several domestic entities are expanding overseas and meeting with success. Companies as diverse as Ayala Land, Jollibee, ICTSI and URC are taking their successful domestic business acumen and applying it across Asia and beyond. With strong cash balances and supportive banking partners, we do see these Philippines corporates look outside the country as well. We hope to grow alongside our Philippine clients as they acquire abroad or grow organically fuelled by their success onshore. We expect the climate for cross-border M&A and investment to grow in the foreseeable future.