Philippines bond plans raises eyebrows in Singapore

Citibank, ING Barings and UBS Warburg vie to bring the Republic of the Philippines to the Singapore dollar bond market.

Sergio Edeza, the country's National Treasurer says that as a result of economic uncertainties in the US, the Republic is looking to fund its budget deficit in currencies other than just US dollars.

"In view of what has been happening in the US recently, we're looking at doing deals in other currencies," he states. "We've received proposals from three institutions, but everything is still in the initial stages. We haven't chosen the bank, how much the deal would be for, or how much interest would be paid. We are currently focusing on issuing in Japan, but we will decide whether to proceed with a Singapore dollar deal by the third week of October."

Bankers say that the Republic has received proposals from three investment banks ù Citibank, ING Barings and UBS Warburg ù to issue S$300 million of five-year bonds. UBS is said to be the favourite.

If a deal were to go ahead, it would mark the first time a Sovereign issuer other than the Singapore government has used the Singapore dollar market and, because the Philippines is rated below investment grade ù Ba1 by Moody's, BB+ by Standard & Poor's ù it would also represent the first sub-investment grade issue from a foreign borrower.

It is this last factor, and speculation that the coupon will have to be about 6.5%, that has raised eyebrows among some debt capital market professionals in the region.

"We've seen deals done in Singapore by the likes of the World Bank and quasi-sovereign issuers such as the Korea Development Bank but this is a different case altogether," says one banker. "This does surprise me, because with a 6.5% coupon it will be very difficult to fully place a deal at launch. I guess that whoever does the deal may take the view that rates will fall further and they'll be able sell it later."

The banker adds that his bank had considered submitting a proposal, but decided not to proceed after talking to investors. "When we spoke to clients, all of them said that the Philippines is rated below investment grade and would not touch it at 6.5%," he continues. "If you think about it, some of the big investors in Singapore are insurance companies. With deals of this size, they are the ones that will each take around S$50 million of the paper, but they would be far too conservative to consider this deal. That leaves the banks and fund managers. They buy S$5 million pieces and it would be asking a lot for them to take up the entire S$300 million."

A second DCM head also feels that trying to sell the deal will prove difficult in Singapore. "The Singapore market is not really ready for this deal," he comments. "Look at the facts: the government of the Philippines is going anywhere and everywhere to raise finance. Investors are being ultra-cautious at the moment and if they were looking at Asian credits, I personally would not place the Philippines at the top of the pile of what could sell at the moment."

The banker also doubts that its prospective lead manager would be able to place it. "Two of the names mentioned do not have the primary distribution capability to place this and would have to keep it on their books before, possibly, selling it later," he concludes. "And let's be honest: deals like this are always being mentioned but how many of them actually get done?"