An Eu500 million ($539 million) seven-year deal is expected to receive Monetary Board approval on Thursday paving the way for launch as early as next week. The Republic has said that it wants to get funding locked in place by the end of the month, but its timing and strategy is already drawing criticism.
In a year when the government and Napocor needs a combined total of roughly $4 billion, no-one doubts the necessity of frequent sovereign issuance. However, the wisdom of attempting such a strategically sensitive transaction just as the European continent girds itself for war against Iraq has been called into question. A number of bankers believe it would make far more sense to supercede the euro issue with a transaction driven by the far less war-sensitive Asian investor base.
Since its debut in March 1999, the Philippines has made a number of attempts to woo the European investor base and extend its maturity profile beyond five years. To date, it has been able to make noticeable progress in terms of investor diversification, but has made none at all in terms of breaking out beyond five years, or narrowing the price differential between euros and dollars.
Its first deal, led by Deutsche, JPMorgan and UBS Warburg, was an Eu350 million deal five-year deal due September 2004. Carrying an 8% coupon, the deal was considered extremely tough, largely placed in the UK and has since been asset swapped into oblivion.
Its second deal, launched in November 2001 via Deutsche, Salomon Smith Barney and UBS Warburg, also comprised a five-year deal, raising Eu500 million. This was priced with a 9.375% coupon and managed to achieve much wider distribution into Germany, Italy, Switzerland and France. Bankers report that the 2006 deal has not been subject to such heavy asset-swapping, is still a feasible benchmark and is currently trading at about 500bp over Libor.
At this level, it is roughly 100bp wide of the Republic's 2024 bond, which is puttable in 2006 and currently trading at around 390bp over Libor. Specialists believe that a four-year maturity extension from 2006 to 2010 should not necessitate that much of a pricing premium and estimate that a new euro-denominated deal will price around the 520bp mark in Libor terms. Again this will represent just over 100bp to an existing dollar bond - the Republic's March 2010 bond, which is currently trading at around 415bp over Libor.
Pending the completion of a euro deal, officials have said the government would like to attempt a longer-dated dollar deal out to 20 years. Current thinking is to try and clear the Republic's remaining $1.5 billion funding requirement by mid-year to make way for Napocor, which needs $2 billion during 2003. However, since investors will almost certainly demand premium pricing for any form of Napocor deal, this seems likely to fall under the government's direct remit as well.
So far, the government has raised $500 million from a re-opening of its 2013 deal and $200 million from a one-year zero coupon deal led by HSBC last week. According to a CSFB research report, the government on behalf of Napocor also "seems to have secured guarantee structures for about $250 million of issuance from each of the ADB and OPIC."
