Investors evaluate Philippines' $1.5 billion bond buyback

The ROP offers a chance to cash out with its bond buyback, but will investors let go of their high-yielding bonds?
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Photo: AFP</div>
<div style="text-align:right; font-size:7pt; color:rgb(119, 119, 119);"> Photo: AFP</div>

The Republic of the Philippines (ROP) on Monday offered to buy back $1.5 billion worth of US dollar and euro global bonds for cash. Citigroup and J.P. Morgan are joint global coordinators and dealer managers. Goldman Sachs, HSBC, Standard Chartered Bank and UBS are joint dealer managers.

The Philippines aims to buy close to 10% of its outstanding $17.7 billion worth of bonds and has told investors the minimum clearing prices for the bonds, which range from $1,100 for the 9% bonds maturing February 2013 to $1,532.50 for the 10.625% bonds maturing March 25, 2025. The offer expires on October 13, 5pm New York time. 

The bond buyback is part of the sovereign’s plan to decrease its expensive dollar-denominated debt and rely more on domestic funding. “The Philippines wants to reduce its dollar debt and repay some of the upcoming maturities such as the bonds that are due in 2013 and 2014,” said one banker familiar with the deal.

The sovereign had earlier planned to issue a global peso note and had mandated the six banks that are currently arranging its bond buyback. However, these plans were put on the backburner, thanks to market volatility.

The Philippines’ old bonds are offering generous coupons in contrast to its recent issues. Its outstanding bonds were sold off earlier this month, but have since rallied in reaction to the news of the bond buyback.

“A lot of these old bonds are paying high coupons in the range of 8% to 10% and its latest 10-year bonds are yielding 3.9%,” said one Philippine-based trader. “So the ROP has to offer a decent premium. At the moment, it’s not very enticing,” he added.

Investors were still evaluating the clearing levels offered by the Philippines on Monday and there was some uncertainty as to how much premium was required amid the sharp market volatility.

“I’m still looking it over, to see what kind of impact the buyback will have on my portfolio. With markets being so volatile, it’s hard to take positions,” said one Hong Kong-based investor. “And it’s hard to figure out how much premium is required to compensate investors for that extreme volatility. While the credit markets have come back in the past three or four days, we’re not sure how long it will last.”

According to a term sheet, the bond buyback will be financed by “certain investible funds from the bureau of treasury” and proceeds of a new $50 million bond offering. It further adds that if any bonds due October 2016 are purchased, these purchases will be made using only the proceeds from the new bond offering.

The clearing price will be determined by a “modified Dutch auction” and the minimum clearing prices may be amended at the Republic’s option no later than 12 noon New York, Wednesday.

Investors can submit their so-called “competitive bids” in which they indicate a specified price at which they are willing to sell their bonds. Alternatively, if they are happy with the minimum clearing prices and keen to get rid of the bonds, they can submit “non-competitive bids” in which they agree to sell their bonds at the whatever clearing price is decided upon.

While investors may not be keen to let go of their high yielding bonds, one person familiar with the deal argues that the limited size of the buyback may help incentivise investors.

“The Philippines is buying back a relatively small amount, so for this exercise to be successful, only about 10% of bondholders need to tender,” said one person familiar with the deal. “The last liability exchange exercise was well received and investors that did not tender then may want to tender their bonds this time round,” he added.

The ROP is offering to buy back 15 tranches of dollar bonds and one euro-denominated bond, namely its 6.25% euro bond maturing March 2016, for which it is offering a clearing price of €1,067.50.

Away from the ROP, financial institution Suhyup Bank, the credit business unit of the National Federation of Fisheries Cooperatives in Korea, starts fixed income investor meetings in Asia and Europe today. It is rated A2 (Negative) by Moody’s and A- (Stable) by S&P. Bank of America Merrill Lynch, Citigroup, ING, Royal Bank of Scotland and Standard Chartered are the arrangers.

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