Using a Dutch auction process, the Republic of the Philippines raised Ps11.2 billion ($216 million) earlier this week from the domestic bond market. The HSBC-led auction differed from standard practise, however, as Government Securities Eligible Dealers (GSEDs) were required to bid through the government curve to win paper.
That banks were willing to do so is largely a matter of tax. When the Republic normally issues bonds in the domestic market, investors are paid net of tax, meaning they receive the coupon minus witholding tax and income tax. This time round, the bonds were paid gross of tax and under domestic law, investors that have a negative tax position do not have to pay tax.
Therefore, many local banks carrying negative tax positions on their books as a result of heavy provisioning requirements would find the bonds very attractive. They would also like them because they can be booked as loans, in the process bring down overall NPL levels.
HSBC officials say the auction closed 1.56 times oversubscribed with bids amounting to Ps15.56 billion, of which Ps8.69 billion came in for three-year paper and Ps6.23 billion for five-year paper. Bids amounting to Ps6.23 billion were accepted for the three-year tranche and Ps5.29 billion for the five-year.
The notes were priced at 8.125% and 9.625% against outstanding Treasury benchmarks at 9.3077% and 10.8923%. This meant the government was able to price at 87% of its three-year curve and 88% of its five-year.
As Stephen Williams, HSBC's head of the Asian debt markets client group says, "We are honoured that the Republic entrusted HSBC with this very important transaction. The responsibility given to HSBC reflects the value put by the Republic in our ability to assess the market and deliver the best execution plan for helping meet the Republic's fiscal objectives."
HSBC completed a similarly innovative deal for the Republic last year when it raised Ps11.81 billion in three and five year notes and then swapped the proceeds to dollars at half the levels the Republic was trading at in the international markets at the time. This year, proceeds have been retained in pesos.