Philippines closes landmark warrant sale

The sale of warrants allows bondholders to convert to peso-denominated debt ahead of risk-weighting increases on foreign-currency debt due to Basel II compliance.
The Republic of the Philippines announced yesterday that it succeeded in selling its maximum target of two million warrants, or an issue amount of $2 billion, in the first transaction of its kind.

The warrants are addressing the threat of bond liquidation following the implementation of Basel II requirements in the Philippines. ôThe transaction ensures that domestic banks still have the capacity to invest in sovereign bonds in a way that complies with upcoming regulations,ö continues the source.

Holders of the sovereignÆs paper can exercise the warrants, which were sold at the minimum clearing price of $7.50, to convert their foreign currency bonds to peso bonds.

ôThe department of finance elected to reach as many investors as possible, opting for the biggest size at the minimum clearing price,ö says a source not wishing to be named.

Large bidders were scaled back to 20% of the available size, while other orders were scaled back by approximately 14.2% on a pro-rata basis.

The transaction, led by Credit Suisse, is a boon for domestic banks that are significant holders of dollar- and euro-denominated sovereign bonds. Under Basel II, holders will see foreign currency debt risk-weighting increase from 0% to 100%, forcing them to set aside more capital for those assets.

Peso treasury bonds, however, will remain 0% risk-weighted. Moreover, holders of paired bonds and warrants will benefit from a risk-weighting of 0% as assigned by the Philippines central bank, the Bangko Sentral ng Pilipinas.

The transaction benefited from a strong offshore bid, with 43% of the warrants selling to international investors. ôInternational investors saw the opportunity to soon distribute the securities onshore,ö says the source. "The warrants will spur demand for sovereign paper at a time when the offshore markets are volatile. Moreover, as demand for corporate lending increases as a result of a strong economy, banks will require a more flexible balance sheet and will seek out those warrants."

"This type of deal works in lower-rated countries with high local ownership of foreign-currency bonds, that faces changes in risk-weighting from 0% to 100%," continues the source, who declined to name specific countries.
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