In the wake of the sale of the largest-ever bond from the Republic of Indonesia, regular issuance running mate, the Republic of the Philippines, was not to be outdone.
At the end of April, it sold a $2.35 billion double-tranche 10-year and 25-year bond which was snapped up particularly by US investors who were hungry for the yield from emerging sovereign paper.
Books that hit more than $9 billion allowed pricing to come in dramatically for joint bookrunners Citigroup, Credit Suisse, Goldman Sachs, Morgan Stanley, Standard Chartered and UBS.
That demand also meant that the traditional new issue premium for the deal was more-or-less wiped out.
The 10-year tranche went out initially at US Treasuries plus 220 basis points while the 25-year tranche – marketed in yield terms – had an initial price guidance of 3.375% area. In the end, they priced at T+180bp or 2.465% and 2.95% respectively, which meant that they had tightened in 40bp and 42.5bp.
“This makes the Philippines, at least for the time being, a diamond in the sovereign issuance space for we were able to convert immense pressure into an opportunity to dazzle in brilliant shine,” said National Treasurer Rosalia de Leon poetically.
She added that the transaction was able to achieve the Republic’s lowest ever coupon for a 10- and 25-year benchmark issuance.
Execution of the deal was, by the Philippine Treasury’s own admission, “opportunistic”.
The bond launched following a constructive week in Asia-Pacific credit markets and capitalised on a short, favourable market window amid broader volatility arising from concerns over Covid-19.
“We have been expecting another successful USD denominated bond issuance despite the challenges the global economy is currently facing,” said Undersecretary Mark Dennis Joven. “This successful issuance has only been a matter of timing.”
Comparisons with the republic’s previous US dollar issue (in January last year) show how far markets have moved. Although the 10-year paper then priced at T+110bp – a comfortable 70bp inside this issue – its yield of 3.782%, means that the Treasury saves around 130bp on the current issue.
The bonds have been rated Baa2/BBB+/BBB, in line with the sovereign and proceeds, the Treasury said, will be for the Republic's general purposes, including budgetary support.
PEARLS BEFORE SWINE
The low interest rate environment means that demand for emerging market debt continues to grow.
In a recent interview with Reuters, Stefan Weiler, head of Central and Eastern Europe, Middle East and Africa debt capital markets at JPMorgan, predicted that emerging sovereign debt issuance this year could beat the 2017 issuance record of $178.3 billion debt.
Emerging market debt issuance so far this year has already hit $100 billion.
"If the market is supportive and there are no setbacks with respect to the virus infection rates and the loosening of restrictions on economies, therefore, continues to unfold as currently anticipated, I expect that market access will broaden and sovereign issuance further accelerate," he said.
And it is specifically those which are rated investment grade which are likely to benefit.
Certainly, this can be seen in the book for the Philippines bond, both tranches of which were dominated by US names. They took 45% of the 10-year paper and more than half of the 2045s.
The upgrade to the Philippines by ratings agency S&P Global Ratings at the end of April from BBB to BBB+ can only have helped.
This put it one notch from one ratings agency higher than Indonesia – a small but psychologically significant distinction.
The Philippine economy is growing at a consistently faster pace than that of its peers. Strong economic growth should continue over the forecast period as long as investment is maintained and together with the government's sustainable public finances, the Philippines' institutional and economic profile has improved, the ratings agency concluded.
“We may raise the ratings over the next two years if the government makes significant further achievements in its fiscal reform program, or if the country's external position improves such that its status as a net external creditor becomes more secure over the long term,” noted Andrew Wood, director of Asia-Pacific sovereign ratings at S&P Global Ratings.
WHERE TO NEXT?
The challenge for the Philippines will be what to do next, especially in a world that continues to be dominated by Covid-19.
“The Philippines… can do more to provide stimulus without hurting market access or debt sustainability,” noted Madhur Jha, head of thematic research and Standard Chartered, in a recent report.
She argues that although the economic disruption caused by the Covid-19 pandemic has been countered aggressively with unprecedented monetary and fiscal stimulus measures in major economies, emerging markets have been more cautious.
The country has enough scope for fiscal easing despite having stable or rising government debt levels, she added.
But the line of fiscal easing is a thin one to walk, especially with a frothy currency.
Scott Thiel, chief fixed income strategist at asset manager BlackRock, is worried that some emerging economies have allowed their currencies to weaken to help absorb the economic shock.
“We see a risk of further currency declines in some emerging economies, and this could wipe out the relatively high coupon income from local debt,” he said.
While a six-month view of the Philippine peso shows little to worry about – it was trading at 50.51 six months ago, versus 50.56 now, according to Bloomberg – within that time it has traded as high as 51.93 and a low as 50.41.
If the Philippines does ease monetary and fiscal policies, Thiel concluded: “Potential capital flight could exacerbate currency declines and force some EM central banks to reverse course and raise rates.”
And that is not likely to do the economy any favours at all.