The Republic of the Philippines re-opened two of its longer duration bonds yesterday (September 8) and upsized the entire deal on the back of a strong order book. Having generated $4.5 billion in demand, the deal was increased from $750 million to $1 billion.
Of this amount, $750 million is being on-lent to Napocor and $250 million will be put towards the Republic's own budget deficit funding requirements. The deal was led by Credit Suisse First Boston, Deutsche Bank and JPMorgan.
The three lead managers received the kind of low fees, which have become customary for Philippine sovereign deals. The 10.625% 2025 bond was re-opened for $700 million on fees of 12bp, while the 8.875% 2015 bond was re-opened for $300 million for fees of 6bp.
The former was priced at 106.25% to yield 9.907% or 492bp over Treasuries. This represents a 1.25% discount to secondary market trading levels when the deal was announced. It will increase the outstanding deal size to $2 billion.
The latter was priced at 98% to yield 9.176% or 497bp over Treasuries. This represents a 1% discount to secondary market levels when the deal was announced. It will increase the deal size to $800 million.
Both discounts are in line with recent precedent. In late July, the Philippines re-opened its 2010 euro-denominated bond at a 1% discount.
Earlier the same month, it re-opened a 2017 bond puttable in 2012 at a 1.25% discount. Then back in April, it re-opened a 2011 bond at a 1.28% discount and a 2014 bond at a 1.046% discount.
What makes the current deal stand out is the overwhelming strength of demand for a credit, which has been out of favour with emerging market investors for just over a year. Of the $4.5 billion order book, about 65% was generated by the 2025 bond and 35% by the 2015 bond. The allocation split is more like 70%/30%.
About 160 accounts are said to have participated in the 2025 bond, which has a geographical split of 37% Europe, 37% US, 26% Asia.
About 125 accounts are said to have participated in the 2015 bond, which has a geographical split of 43% Asia, 31% Europe and 26% US.
About half the investors participated in both deals and just under a third of the Asian demand came from the Philippines, a relatively low number.
Specialists say there are two main reasons why the deal was so well received. Firstly it is the first emerging markets sovereign transaction since the summer break and it comes to a market with an improved appetite.
As one banker comments, "High grade bonds have started to perform and now investors seem to be getting comfortable with high yield again. There's a strong consensus that interest rates will rise very gradually and as a result of this, accounts seem prepared to start looking for duration and higher beta credits."
The second reason is that Philippines' spread performance has so far lagged the wider EMG universe. With the exception of the shorter-dated bonds, most ROP paper has widened 5bp to 25bp over the past month.
So far the market has accorded little credit to the new Arroyo administration's financial restructing plans, or lack of. It will be interesting to see now if the success of the new bond injects some positive spread momentum back into the Ba2/BB rated credit.
According to Barclays research, published in early September, the Philippines still needed to raise up to $2 billion to cover its 2004 funding needs. The bank estimated that the Philippines had raised $4.05 billion from a combination of sovereign borrowings ($3.1 billion), Napocor borrowings ($550 million) and concessional lending ($400 million).
It calculated that funding needs were $6.5 billion. This included $3.9 billion for the sovereign and $2.4 billion for Napocor. On this basis, the Philippines still needs to raise a further $1 billion to $1.5 billion.