With HSBC as global co-ordinator, alongside Deutsche Bank and JPMorgan as joint bookrunners, pre-marketing begins this morning (Monday) for a $700 million transaction. Ironically, the uncharacteristic secrecy surrounding the deal appears to have worked too well and it now looks to be coming right on top of a competing sovereign issue from the Federation of Malaysia. Having similarly kept its cards close to its chest, Malaysia is also said to be a day away from launch under the still unconfirmed lead of Morgan Stanley and UBS Warburg.
Investors report that the Philippines' issue will be soft marketed for one day, before being formally launched on Tuesday and either priced later that day, or Wednesday. Where Malaysia is concerned, accounts say they have been canvassed on a $500 million re-opening of the sovereign's July 2011 issue, although some also comment that the sovereign has been considering issuing a new 10-year benchmark as well.
Should both transactions launch together, there will be some, although probably not significant cannibilisation of each other. But ambitious pricing expectations will need strong Asian demand and unlike the US investor base, there is less of a distinction in the region between accounts able to purchase high grade Malaysia and those able to purchase the non-investment grade Philippines.
Competition issues aside, however, the general backdrop for both deals remains conducive, with Treasuries stable for the past week and credit spreads continuing to trade in.
The Philippines, in particular, has benefited from positive momentum generated by Moody's upgrade in credit outlook from stable to positive at the beginning of February. Standard & Poor's officials will also be in Manila this week to conduct a review of the agency's BB+ rating, which currently has a negative outlook.
Having traded at 420bp bid a week ago, the Philippines benchmark 9.875% 2010 issue has broken through the 400bp mark for virtually the first time since the actual week of launch at 350bp over Treasuries back in March 2000 as part of an exchange and tender offering for Napocor debt. Having traded out at the 600bp level as recently as last September, the deal closed Asian trading Friday on a bid/offer spread of 384bp/373bp to yield 8.5%
Sandwiching the prospective seven-year deal on the other side of the curve, the Philippines also has an 8.875% 2008 issue outstanding, which is trading on a bid/offer spread of 399bp/388bp to yield 8.1% bid. Based on these levels and taking into account a slight new issue premium, a new deal could expect to yield around 8.5%.
Country specialists say that while the deal replaces Napocor's botched $500 million offering of early February, proceeds will not be on-lent to the power utility, but retained by the Department of Finance for general budgetary purposes. The only two things that remain the same from the original issue are the maturity and presence of JPMorgan, which was drafted in to prop up the efforts of the earlier deal's lead manager Bear Stearns.
JPMorgan always seemed likely to retain the lead position on any new deal, the only question being which bank, or banks would join it. The Republic sent out a formal RFP (Request for Proposals) to 14 houses just over a week ago and has driven most to distraction over the past week by refusing to name the winners.
For HSBC, the mandate marks another step forwards in its relationship with the Republic and an acknowledgement of its somewhat solitary efforts to develop a local bond market in the country. So too, for Deutsche the deal is also a coup and reflects its close relationship with Finance Secretary Camacho and willingness to sacrifice fees to break into new business.
Indeed, competition to secure the few Asian sovereign mandates on offer has never seemed more cut throat. And the result appears to be fee levels that are half what each sovereign would normally expect to pay. The Philippines' issue, for example, is said to be paying 32.5bp and the Malaysian issue an even more miserly 25bp.
The latter fee level is said to have been the key to UBS Warburg's selection as lead manager. If correct, the bank has successfully stolen a march on Credit Suisse First Boston and Salomon Smith Barney both of which manouvered aggressively for the transaction. Despite the fact that there would have been pressure to rotate the deal away from Salomon, which led both the 2009 and 2011 issues, the two houses were considered to be the main contenders to join Morgan Stanley, until being completely blindsided by their rival's sudden emergence from nowhere two weeks ago.
Investors report that should Malaysia re-open the 2011 bond, it is looking to print around the 185bp level. This represents a very slim 5bp premium to the close of trading in Asia last Friday when the $1 billion deal was quoted at 180bp/172bp to yield 6.6% bid.
Similar to the Philippines, investors are likely to be buoyed by an improving macro picture for the export-oriented Federation, whose fortunes remain heavily geared to US growth figures. So too, moves to speed debt restructuring and efforts to bring some form of corporate governance to the country's politicised corporate sector have been rewarded with tightening spread levels.