Napocor RFPs $1.5 billion bond issuance

The Philippines utility with an uncanny knack of completely misreading the market seeks financing proposals for 2004.

The National Power Corporation of the Philippines (Napocor) sent out a verbal RFP yesterday (Thursday) seeking proposals to raise up to $1.5 billion during the first quarter of 2004.

The utility says it is open to either dollars or euro and will consider a range of maturities spanning five, seven, 10, 15 or 20 years. It also adds that it will give preference to proposals for transactions in its own name, rather than those with a sovereign guarantee.

Responses are due by December 5. However, bankers that received the RFP have responded with complete incredulity. Time and time again, Napocor has tried to raise funds in its own name, yet in every single instance it has been a complete and utter disaster. But the group never seems to learn from the experience.

The last time Napocor attempted a vanilla dollar bond issue was in June this year when Citigroup held a mandate for a $500 million 10-year issue. However, in a pattern that has been repeated many times, investors demanded a huge premium over the sovereign curve, the deal collapsed and the sovereign had to step in to raise funds in its own name, before on lending proceeds to the group.

At the time it seemed that all involved might have finally learned their lesson. As National Treasurer Sergio Edeza concluded, "We're better off doing a transaction on behalf of Napocor ourselves."

"Even when we went out with pricing guidance at 75bp over sovereign paper, the premium was already way too high," he commented. "And we ended up with a situation where most investors were asking for 125bpt to 150bp over. It just made no sense at all."

Over the last week, both Edeza and Finance Secretary Jose Camacho have resigned leaving a vacuum at the Department of Finance.

Fittingly, Napocor has taken the opportunity to step into the breach and could hardly have failed picked a worse day on which to RFP a new deal. Thursday saw the Peso fall to a new low against the dollar (Ps55.69) and the stock market suffer its biggest drop in three months after former actor Fernando Poe declared his bid for presidency.

A friend of disgraced President Joseph Estrada, Poe has no political experience, only eight years of formal schooling behind him and no economic training. Investors have not surprisingly wondered whether the Philippines credit is about to unravel and their fears have been compounded by Moody's decision to put the sovereign's Ba1 credit rating on watch for downgrade. The Philippines has already been downgraded by Standard & Poor's from BB+ to BB.

Napocor spreads already stand at a significant premium to the sovereign curve aside from any likelihood of a new issue premium. The group's $140 million 7.875% December 2006 bond, for example, is currently bid at about 7.6%or 520bp over Treasuries.

At this level, it is about 100bp over the current trading level of the Philippines recent November 2006 bond, which is trading at about 430bp over Treasuries.

One of the other main problems with Napocor is the illiquidity of its entire curve since an exchange offering in 2000. The group also has a $118 million 8.4% December 2016 bond bid at 10.76% to yield 569bp over Treasuries yesterday and a $61 million 9.75% May 2028 bond bid at 11.57% to yield 650bp over Treasuries.