Napocor lights up the market

With a history of failed attempts at bringing deals to the international debt capital market, Napocor finally gets it right.
The Republic of the PhilippinesÆ National Power Corp (Napocor) entered the international bond markets yesterday with a Reg-S/144a $500 million bond issue. The deal enjoyed one of the most straightforward executions of a bond in recent months, providing a striking contrast to the problems that Napocor has had with other transactions in recent years.

The notes are irrevocably and unconditionally guaranteed by the Republic of the Philippines which has an unconditional direct guarantee on all of NapocorÆs debt obligations.

The BB-/BB rated transaction closed shortly after New York's open with the books oversubscribed by five times - the largest book ever for Napocor. Under the lead management of Citigroup and Deutsche Bank, the 10-year deal was priced at the tightest end of an indicative yield range spanning 7% plus or minus 0.125%.

Pricing came at par on a coupon of 6.875%. That equates to a pricing spread of 207bp over Treasuries or 151 over Libor. A total of 210 accounts participated in the deal and over 100 of these were new to the credit.

The geographic split saw 31% placed into the US, 20% placed into Singapore, 14% into the Philippines, 14% to continental Europe, 12% to the UK, 8% into Hong Kong and 2% to other Asian countries. By investor type, funds bought 49%, banks took 24%, insurers, pension funds and commercial banks took 21%, and retail accounted for the remaining 6%.

The deal achieves very attractive pricing for a credit that has had a much checkered history in the international capital markets. Banks have struggled in the past to bring a full Napocor transaction to the market, with previous attempts systemically failing before pricing. Previously, the sovereign has had to issue in its place and then on-lend the proceeds to the utility.

This time, however, Napocor has set very assertive standards in terms of execution and pricing.

The pricing comparables are clear. Napocor has a 2011 deal which is currently trading at Libor plus 139bp. This puts that deal 5bp inside of CDSs and 70bp over the comparative Republic of Philippines 2011. At 6.875%, the new deal comes at a premium of only 27.5bp to the implied trading level of a new November 2016 sovereign deal. Making this deal tight for Napocor versus the sovereign. The Philippines does have an existing 2016 deal; however that was completed in January, and as such is almost a year shorter in terms of maturity.

Additionally, IndonesiaÆs national power company PLN, which completed a landmark Reg-S 144a $1 billion dual-tranche bond earlier this month is trading at 7.575%, meaning that NapocorÆs deal comes 70bp inside of PLN.

Execution was crucial given the problems encountered in the past. The leads and the government û National Treasurer Omar Cruz was the lead government official on roadshows - managed the deal along the lines of recent sovereign transactions, which have effectively rehabilitated the Philippines as an issuer in the global markets.

The leads, who are both experienced sovereign deal managers, announced the deal in the Asian mid-morning on Wednesday and priced at midnight, which is in fact faster than the typical Philippine sovereign deal.

The borrower provided the market with a sense of clarity as to its objectives in terms of size and pricing. Like previous Philippine deals, Cruz announced the size and price early and remained resolute on size despite the mammoth order book that was created.

The deal was further helped by the fact that the government will likely raise even less money in the international capital markets in 2007. The implication of which is that investors were able to get exposure to a constrained sovereign issuer, with the benefit of a slight yield pick-up.

In June, Finance Secretary Margarito Teves announced that the Philippines was on course to cut its deficit to Ps63bn ($1.26 billion) by the end of 2007, with an eye on balancing the budget by the end of the following year. And with it, end the countryÆs disproportionate reliance on foreign borrowing.

Indeed, Budget Secretary Rolando Andaya has said that total 2007 borrowings by the government will fall 26.49% to Ps390.8 billion ($7.8 billion), with the foreign component down to Ps130 billion ($2.5 billion).

Napocor is the principal power provider in the Philippines, owning 6,622 megawatts (MW) of installed capacity. This includes the additional capacity provided by plants owned by Napocor but operated by independent power producers (IPPs).

As a stand-alone credit, Napocor's profile is very weak and there remains a certain level of uncertainty over Napocor's operating environment. The government has been attempting to restructure Napocor by transferring its assets and liabilities to Power Sector Assets and Liabilities Management Corp. (Psalm), which would in turn sell-on the assets and privatise them. Under the Electrical Power Industry Reform act that was approved by congress in 2001, Psalm was created to sell 5900 megawatts (MW) of total capacity.

However, the government has not been able to get the privatisation of its power sector on line.

The government had set a benchmark for the first quarter. Last year, Psalm president Nieves Osorio announced that she aimed to sell nine more Napocor power plants before December and at least 70% of NapocorÆs Luzon and Visayas plants by the first quarter of 2006.

These include the decommissioned 225MW Bataan thermal facility, the 200MW Manila thermal complex, the 104MW Aplaya and 54MW Cebu II diesel plants. As well as operational plants; the 600MW Calaca coal-fired facility, the 660MW Tiwi-Makban geothermal complex, the 112MW Pantabangan-Masiway hydropower plant, the 360MW Magat hydropower and the 150MW Bacon-Manito geothermal power facilities.

As of September, not one of these plants had yet to be sold. In fact, previous bids for assets have been rescinded. In July, the government terminated its agreement with YNN Pacific, after it reneged on its obligation to make an advance payment of $227.5 million for the Masinloc coal-fired facility. While Ayala Corp, who had previously submitted letters of intent for the Tiwi-Makaban complex, has pulled out stating that it wished to review the situation.
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