Philippines mandates euro-denominated bond

Despite past difficulties issuing in the currency, the Republic appears determined to try again so that it can on-lend proceeds to Napocor.

Deutsche Bank, Salomon Smith Barney and UBS Warburg have been mandated to lead manage what is expected to be an Eu250 million ($224 million) five-year offering, with roadshows tentatively scheduled to begin during the last week of November.

So far this year, the Department of Finance has won plaudits from most of its relationship bankers for dealing with widening spreads by pursuing a relatively careful international issuance policy, which has seen it take advantage of pockets of demand through a series of small-scale and hard underwritten deals. However, plans to issue in euros evoke memories of two unhappy brushes with the currency which led to the Republic's only existing benchmark, its Eu300 million offering of 1999.

Like a number of the Republic's past deals, the five-and-a-half year issue suffered from being far too ambitious and overbanked, with the number of bookrunners growing by the week in the run up to launch in March 1999. Having initially mandated JPMorgan and Warburg Dillon Read, first Deutsche Bank and later Goldman Sachs were added to the roster before the deal was priced during the first week of March at 425bp over Bunds, a 100bp pick-up to its dollar paper on an asset swap basis.

At the time, lead managers acknowledged that the deal had been an incredibly tough slog and when the Republic announced its intention to launch an Eu700 million 10-year deal one year later, most believed the plan would never succeed because the issue size was too large and the tenor too long. JPMorgan was again appointed bookrunner, alongside Credit Suisse First Boston and later ABN AMRO, which was included after allegedly bidding low fees.

Few were surprised when the deal never got off the ground and most banks have continued to advice the Republic to stick to dollars where it already has a diversified investor base that understands the credit. This time round, some believe that the Republic may be able to score a minor success because it is keeping the issue size small and the tenor short enough to attract European retail demand.

"I think the Philippines feels that because it's tapped the dollar markets so many times over the past few years, it may be able to find new demand by going to Europe where there isn't that much exposure to its paper," says one banker.

"The main problem is that when risk appetite is high, investors buy Philippines paper," he adds. "But when it's not, the Philippines is always the first Asian issuer to be sold off because it yields a higher spread and is liquid so, therefore, easy to get out of. In this environment, it's harder not easier to penetrate a relatively new investor base."

The Republic's outstanding 2004 bond is currently bid at about 440bp over euribor. Its August 2004 bond (issued by the central bank) is trading on a bid/offer spread of 545bp/505bp over Treasuries, a yield of 7.7%.

The Republic's desire to issue in euros has always traditionally been motivated by the fact that the interest rate differential between the euro and dollar markets means it can hit its yield targets even after paying a premium to its dollar bonds. Bankers say it is intending to on-lend proceeds to the National Power Corporation (Napocor), whose previous plan to raise $400 million from a seven-year bond via Bear Stearns has so far failed to materialize.

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