The Republic of the Philippines accessed the international bond markets for the first time in 2005 late on Wednesday (January 26) with an increased $1.5 billion 25-year bond issue via Citigroup, Deutsche Bank and UBS.
Prior to the deal, non syndicate banks had been worried the leads would try and push the issue size and indicative pricing too far and reverse the positive spread momentum the sovereign has been enjoying so far this year. Yet in the end, the opposite happened and the huge momentum generated by the deal followed through into the secondary market, leading analysts to confidently predict another 25bp to 30bp of spread tightening over the coming few weeks.
The deal was initially sized at $1 billion with price guidance around the 9.875% level. This was later revised to 9.75% and the deal size increased to $1.5 billion on the back of an order book that closed five times covered with participation by more than 400 accounts.
The Ba2/BB- rated issue was priced at 98.131% on a coupon of 9.5% to yield 9.7% or 503bp over Treasuries. Fees have not yet been finalised, but are said likely to come in around the 10bp range.
Final pricing represents a 17bp premium to the Republic's 10.63% March 2025 bond, which was bid at 109.625% to 110.875% at the time of pricing, or about 9.53% in yield terms. Specialists say this represents a very tight differential relative to other emerging market comparables.
B1/BB- Brazil, for example, has a 2024 and a 2030 bond trading at a 53bp differential. Ba2/BB rated Colombia has a 2027 and a 2033 bond trading at a 30bp differential.
The Philippines ability to secure such a tight differential has been attributed to two reasons. Firstly, bankers believe all the bad news is now priced into the credit giving investors some confidence to bid it back in again.
Secondly, the Asian high yield markets are currently on fire and the Philippines has been a direct beneficiary of investors' desire for yield. It also chose the long end of the curve as this has been where there has been a lot of buying interest.
Over the past month, the Republic's 2024 bond puttable in 2006 has been the best performer, coming in nearly 80bp, while its 2009 and 2010 bonds have come in over 50bp. In the day running up to price at New York's close, the whole Philippines curve was bid up between 0.4 points and 0.65 points.
Strong demand was also re-inforced by a new funding strategy. Over the past couple of years the sovereign's yield curve has been continually weighed down by supply pressures emanating from its drip, drip approach to funding.
Now, however, the taps and small deals are being replaced by a couple of benchmark bonds. Officials have told investors the sovereign is only likely to come back in size during the second half of the year. The government has said it is likely to source $3 billion to $3.5 billion from the public markets in 2005 and about $1 billion to $1.5 billion from multi-lateral sources.
Re-assured that they will not be continually bombarded with new paper, some investors are said to used the new deal to re-build sizeable positions. "There were a number of orders in the $200 million to $300 million range and they would have been quite happy to be filled," notes one participant.
Distribution statistics show that 35% went to the US, 35% to Europe, 16% to Singapore, 10% to the Philippines and 4% to Hong Kong. By investor type, asset managers took 74%, banks 13%, retail 9% and insurance companies 4%
Bankers believe the sovereign also timed the deal well. The prospect of an imminent downgrade from Moody's had little effect since it is already priced in.
Relative to Treasury spreads, the deal came in the middle of the sovereign's 12-month trading band. The 2025 issue has traded as tight as 450bp over and as wide as 550bp. On a yield basis, however, the new deal has come at the tight end of an equivalent trading band of 9.4% to 10.8%.
Analysts believe momentum from the new deal is likely to feed back down through the yield curve and pinpoint the 2019 and 2025 bonds as the most likely beneficiaries in the short term since there is currently a 40bp differential between the two.