Napocor revives bond (again) as BSP re-opens deal

The central bank's successful $250 million re-opening of its November 2005 bond issue yesterday (Tuesday) underlines continuing strong demand for the country's credit.

Representing the BSP's third tap in as many months, the latest offering has also created a $800 million issue whose liquidity should give an additional boost to spreads which have traditionally lagged those of the Republic. Partly as a result of a controversial Yankee bond of 1997 and partly because it is a less frequent borrower, the BSP can trade anywhere between 25bp and 75bp behind the sovereign.

The new deal, however, propels the central bank's issue into the ranks of the region's top 20 deals by size. Under the lead of JPMorgan, which also ran the books for the two previous deals of late October and November, the BSP priced a $250 million deal due November 2005 at 103.25% with a coupon of 9% to yield 7.99% or 386bp over Treasuries.

At these levels, it was said to have come flat to the sovereign's interpolated curve and at a roughly 10bp premium to the outstanding deal, which was bid at 103.75% at the time of pricing. This compares to a 30bp premium to the interpolated curve in October and a 15bp premium in November.

Although demand for the issue was said to be strong, bankers say the borrower decided to cap the amount to avoid bunching too much debt at the four year part of the curve and as a result, the deal was only marketed in Asia. Of the 30 investors which participated it was, therefore, not surprising to find that 85% came from the Philippines and the remaining 15% from the rest of Asia. About four orders were said to top the $50 million mark.

Chris Nicholas, JPMorgan's newly anointed head of fixed income comments, "The speed and efficiency with which this transaction was executed is a clear sign of the BSP's maturity as a borrower in the international debt markets."

The original deal, which comprised a $350 million offering, was priced in late October at par with a 9% coupon to yield 517bp over Treasuries.

The next sovereign-related entity out of the Philippines is expected to be the National Power Corporation (Napocor), which is preparing to begin roadshows for a $500 million seven-year bond in Asia next Thursday under the lead of bookrunner Bear Stearns and joint-lead JPMorgan.

Bankers have long questioned the cost rationale for the deal, which carries political risk guarantees and a sovereign re-payment guarantee. First mandated to Bear Stearns last September, only to be postponed after September 11, the deal then re-surfaced again briefly in November before many assumed that it had been cancelled for good.

On a stand-alone basis, few would doubt that having a political risk guarantee makes sense, since it is said to have cost 40bp and bumps the credit rating into low investment grade territory (BBB-). As the new deal is said to be aiming for pricing about 50bp through the sovereign curve and Napocor's outstanding paper is currently trading 70bp behind it, this would represent a substantial cost saving.

Its 7.875% December 2006 bond is, for example, trading on a bid/offer spread of 476bp/424bp over Treasuries. Like all of the company's bonds, which were subject to an exchange offering in the spring of 2000, the deal is highly illiquid.

However, there are those who will argue that the Department of Finance (DoF) should simply borrow funds in its own name and on-lend the proceeds as it did last week with its $750 million 15 put 10 deal, of which $250 million was earmarked for Napocor. Since the difference between a pure sovereign issue and the new issue is only likely to be about 10bp, many will ask whether the saving was really worth it when the additional time and cost of documentation and lawyers is taken into consideration.

Winning the mandate is a coup for Bear Stearns, but the investment bank has strong connections in the Philippines since its local rep is also aligned to Synergy, a financial consultancy run by former DoF Undersecretary Joel Banares and Napocor CEO Guido Delgardo.

On the positive side, there are those who note that the deal is likely to be well received given that the seven-year part of the curve is unpopulated and the bond's intermediate tenor will appeal to both foreign and local investors.

In the meantime, conglomerate JG Summit has begun roadshows for a $100 million four-year bond via ING Barings. Having launched the deal in Manila yesterday, presentations will continue in Singapore today followed by Hong Kong on Thursday, for pricing early next week.

The deal is being pitched at a 75bp pick-up to the mid-point of the BSP's 2005 bond. The issuer has chosen to come to the bond market rather than the bank market because it only recently completed a $102 million syndicated loan last November. With a five-year final maturity and three-year put, the deal was priced at 320bp over Libor, with a flat fee of 75bp, equating to an all-in of about 415bp over in Treasury terms.

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