The Republic of the Philippines continued its battle for acceptance with euro-denominated investors yesterday (Thursday), pricing a reduced Eu300 million bond. At the same time, Ayala Corp launched a $150 million five-year deal via JPMorgan, which is expected to price later today.
Lead managers for the Philippines seven-year deal were Credit Suisse First Boston, Deutsche Bank and JPMorgan. Pricing came in line with the pre-marketed range on an issue price of 99.375% and coupon of 9.125% to yield 9.25%. This equated to a Bund spread of 570bp, a euribor spread of 555bp and an equivalent Libor spread at the same level.
Having built an order book of Eu450 million, the BB+/Ba1 rated credit took the decision to downsize the deal to fit investor appetite and make sure it trades well in the secondary market. Given the country's heavy borrowing requirements this year, observers are likely to applaud a move, which should uphold its market credibility and underline the government's longer-term approach towards continued market access. It also shows that while the Philippines is making some progress in the euro sector, it still has a very long way to go and has had to sacrifice size for maturity.
On the plus side, the country has achieved a long cherished aim of extending the yield curve out to seven years and narrowing the pricing differential between euros and dollars. The deal represents the first seven-year offering by any Asian borrower and is virtually the only true emerging markets credit to tap the sector this year - earlier deals by Poland and Hungary, for example, are both considered convergence plays.
At 555bp over Libor, the deal has come at a roughly 58bp premium to the Republic's March 2010 bond, which was being quoted at Asia's close yesterday at 497bp over Libor. Both of its previous two five-year euro-denominated deals priced at a 100bp premium to the dollar curve and its outstanding November 2006 euro deal continues to trade at an 80bp to 90bp premium.
This latter deal was being quoted yesterday at 490bp over euribor, while its 2024 put 2006 dollar bond was trading at 400bp over Libor.
For many market participants what will be most interesting about the new deal is its distribution pattern. Both of the Philippines' previous deals found little Asian support and had to work hard to find acceptance with a European investor base that is unfamiliar with the credit, and as some would argue, not that interested either. This time round, however, 40% of the deal was placed into Asia of which 42% went into the Philippines, with 32% going to Europe and 28% to the US. In November 2001, by contrast, 60% of an Eu500 million five-year deal was placed into Europe and 20% each into Asia and the US.
In recent months, the growing strength of the euro has attracted greater interest from Asia and a number of bankers have noted increasing appetite from Asian central banks. And while this is an investor segment, which typically only purchases highly-rated paper, the Philippines geographical proximity and its repeated issuance in euros makes it a more natural buy.
In terms of investor type, observers say that 40% of the deal went to funds, 30% to banks, 25% to private banks and 5% to insurance companies. A total of 82 investors participated, of which 35 were new to the credit. A second interesting aspect of the deal is the high percentage participation by private banking clients, almost all of which are said to be new to the credit. This was also said to be the case for the insurance companies.
But the deal's greatest challenge was market conditions and this is where the government has attracted most criticism. Few doubt that diversification into euros makes sense since it alleviates pressure on the country's dollar curve at a time of heavy issuance. However, while some believe now is not the time to approach Europe, others argue that impending war in the Middle East could still be hanging over the market into the summer.
"This is a credit, which needs to be proactive and can't risk hanging around," states one banker. "And the fact is that we are now into the second week in February and have seen the Philippines raise a total of $1.525 billion. The country is nearly halfway through its funding for the year."
But launch run up against the first concrete signs that Asia is starting to take war in the Middle East seriously, with traders reporting a fading bid and steep decline in liquidity, particularly for non-investment grade credits. Philippines spreads have widened 15bp so far this week and most believe this stems from rising geopolitical tension rather than new supply.
As Barclays wrote in a research report today, "At long last the complacency surrounding tension in the Middle East ate into the seemingly invulnerable Asian bond market."
Friday will also see the pricing of an Asian-targeted bond by Ayala Corp, the one domestic credit, which can come close to the sovereign curve and is viewed by some accounts as a far superior credit. Some believe that the five-year deal has been hard underwritten by the lead and is being pre-marketed to yield round 8.25%.
At this level, it will come at a 37bp premium to the sovereign, which has an April 2008 bond trading at 7.88% to yield 497bp over Treasuries. This is roughly the premium Ayala paid back in 1999 when it launched a $200 million five-and-a-half year bond via Goldman Sachs. This was priced at a 30bp premium to the interpolated sovereign curve and carried a coupon of 8.75% to yield 310bp over Treasuries.
Some have wondered why a credit of Ayala's standing would chose to access the market now. The group had previously made noises early last summer, but did not get as far as mandating a deal. Earlier this week, its property unit Ayala Land formalised an agreement with Metro Pacific to take over a $90 million loan secured by a 50.4% stake in the Bonifacio Land Corporation.