Over the past few days, bankers have been furiously pitching the government to emulate its strategy of January 1999 which led to the launch of one of the Republic's most successful international bond deals to date: a $1 billion split 10 and 20 year transaction via JPMorgan, Morgan Stanley and UBS Warburg. And it looks as if they may have succeeded, with the Department of Finance said to be leaning towards a $500 million 10 year global via two to three lead managers in place of a 15 put 10 private placement via CSFB, originally scheduled to price yesterday.
With interest rates still at historic lows, primary markets currently clear and secondary support strong, bankers believe that issuance conditions are as near perfect as they could be for the Philippines first major dollar benchmark deal in nearly two years.
International bond markets are often at their strongest during the first couple of weeks of the year as global fund managers re-weight their portfolios. Unlike their global peers, the few Asian issuers able to get a deal to market quickly are also advantaged by the lack of much competing paper from the region. Similar to 1999, the Philippines is further riding a wave of positive spread momentum as funds continue to move out of Argentina into more stable comps.
This latter trend first became obvious last November as the exit from Argentina speeded up and funds had their interest pricked by the first non-deal roadshow from the Arroyo government. Until this point, Philippine spreads had been extremely firm at the short end of the curve because of strong local support, but had little international support at the longer end.
As one observer comments, "The Philippines had got through congressional elections, passed the long-awaited power bill and jammed through the anti-money laundering bill, but the government hadn't gone out and officially told anyone. They finally did so just as international fund managers were looking for a new home to park their cash."
Consequently, Philippine spreads were the star performers of November and December, with the benchmark $600 million 9.875% March 2010 trading in from 640bp bid on November 8 to 395bp bid on January 8, a 245bp contraction in the space of just two months.
JPMorgan sovereign strategist David Fernandez says, "The spread contraction of the last two months of the year meant that the Philippines was the top performing country component of JACI (JP Morgan Asia Credit Index) during 2001, returning 26.8% compared to 14.7% for Thailand and 14% for Korea. In the wider emerging markets context, a return of 5.87% for December meant that the Philippines was the third best performer of the EMBI behind Ecuador and Pakistan."
Should the Philippines opt for a new global bond, the key question for fund managers will be whether the rally can continue for much longer. At 395bp over Treasuries, the 2010 is nudging a yield close to 9% and some bankers believe that funds will not be willing to stomach anything much through this psychological barrier.
Others however, comment that while it may be prudent to take profits soon, the rally still has some legs to it. As one puts it, "We're still bullish on the Philippines because a client survey has shown that some dedicated emerging markets funds are still only neutral to slightly overweight on the country and are likely to build up positions. There are also a lot of hedge funds which are short and this factor should continue to provide support to spreads at the longer end of the curve."
With bankers convinced that investors are looking for a benchmark public deal, many argue that clarity over the Philippines' fundraising plans will further underpin spread momentum over the short to medium term. During 2001, the BB+/Ba1 credit opted for a large number of small-sized, often hard-underwritten deals that were usually privately placed and not particularly liquid. While the strategy suited market uncertainty in the run up to the summer's elections, Argentina's meltdown and then September 11 and its aftermath, it does fit so well with bull market conditions.
The situation is complicated, however, by the CSFB private placement, the origins of which hark back to July 2001 when the investment bank pitched aggressively and won the mandate for a $500 million 10 year global bond at 510bp over Treasuries. Having agreed to hard underwrite the issue roughly flat to the Republic's existing 2010 bond, the bank was suddenly faced with spreads that had backed up 50bp in the space of a week as Argentina's worsening situation sent all emerging market spreads wider.
What then happened next is open to debate, but consensus has it that the bank provided the Republic with a $250 million bridge at 520bp over Treasuries. This deal is said to have had a 15-year final maturity and a put option enabling CSFB to re-finance it within a one-year period.
Bankers believe CSFB first began to put out feelers in December at which point it would have probably broken even on the trade. Originating the deal now at 520bp, on the other hand, and then selling paper on in the secondary market will leave the bank significantly in-the-money. Most country experts believe that a new 15-year trade could price around the 480bp mark, some 40bp tighter.
This is based on the fact that the Philippines' $1 billion 10.625% March 2025 bond is bid at 507bp, its $1.1 billion 9.875% January 2019 bond at 474bp and its $1.74 billion 6.5% December 2017 bond at 518bp.
Having not held CSFB to its bid in July, Philippines' Treasury officials are likely to be currently arguing for some leeway. Observers comment that by Tuesday night, government officials were indicating that they would re-pay the bridge and then re-cycle the mandate into an enlarged global bond, giving CSFB one lead manager's slot alongside either one or two other banks.
To fund its projected Ps130 billion deficit during 2002, the Republic has said that it intends to borrow 48% from domestic sources and 52% from international sources. Of the $2.7 billion international component, some $1.3 billion is slated to come from ODA sources and $1.48 billion from commercial borrowings. On top of this, the Bangko Sentral ng Pilipinas (BSP) will come to the market and the Republic itself is also likely to borrow and then on-lend funds to the National Power Corporation (Napocor), which has cash requirements of $1 billion.
JG Summit comes to market
Next week is also likely to see the launch of roadshows for the Republic's first corporate bond offering of the year. ING Barings, the house bank of the Gokongwei controlled group, is said to be priming a $100 million four-year bond for JG Summit. Observers say that indicative pricing is likely to be pitched at a roughly 75bp pick-up to sovereign spreads, a relatively aggressive but achievable level.
Last summer, the diversified conglomerate completed a three-year loan at a 100bp pick-up. JG Summit's main subsidiaries include agro-industrial and branded foods group Universal Robina Corp, Digital Telecommunications, Robinson's Land, Robinson's Saving Bank, Litton Mills and Cebu Pacific Air.