Globe Telecom, the biggest digital phone company in the Philippines has launched its first domestic bond deal, despite an unfavorable climate for issuers. HSBC acted as lead manager on the transaction.
International and domestic debt issuance from the Philippines has been virtually non-existent in recent months as a result of political and economic uncertainty. A high interest rate environment has also resulted in few issuers being either willing or able to issue bonds. Globe, however, was willing to take the risk in order to diversify its funding sources.
Its Ps1.085 billion ($22.5 million) transaction is innovative in that it encompasses both fixed and floating rate paper of maturities between three and 10 years. It is the first time in the domestic market that floaters have been used in a non-commercial paper transaction.
However, the size of the deal was actually reduced in size from Ps1.5 billion because of a shift in demand among investors away from floating rate paper. Originally, it was hoped that the deal would be split between two-thirds fixed and one-third of floaters, but in the end the ratio was 80:20.
"Between the time we started launching the deal - when Estrada was still President - and when we closed, it was interesting that the demand for floating rate paper went down," explains an official at HSBC. "The structure we used was more flexible in recognizing shifts in demand, and with the current yield curve it was decided that we may as well go with more fixed rate notes."
Some Ps835 million of fixed rate notes were split into three-, five- and 10-year maturities, all of which tightened considerably against benchmark during the auction process. The three-year piece was priced on an annual coupon of 14.25%, the five-year at 14.75% (against the 14.195% benchmark) and the 10-year paper at 16%.
Some Ps 250 million FRNs were split into three- and five-year pieces. The shorter maturity notes were priced at 1.5% over the 91-day benchmark - 11.08% at the time the deal closed - coming in from 1.75%, while the five-year bonds carry a coupon of 2%.
According to the HSBC official, that majority of the bonds were bought by insurance companies, with going to 25% bank investors and a small scattering placed with retirement and investment funds.
Bearing in mind the difficult economic climate, a second local banker thought it unlikely that Globe would be back in the market for some time. "It's a good enough transaction for the issuer, indicated by how the price tightened during auction," he says. "But if I was to advise the issuer on whether to do another deal, I would say don't try to hit the market now."
Although the Philippine bond market faces some difficulties, the HSBC official was more upbeat about the future under the new political administration. "The government is trying its best to bring down the budget gap which has always been a big problem here," he explains. "We have seen high interest rates, but the government announced that it will cut the auction of seven-year and 10-year rates in the first quarter.
"I believe that when we see the effects of those changes being announced, things should start picking up by the second half of the year," he says. "So I would advise any potential issuer to start preparing documents for deals to take advantage when the market picks up again."