The Republic of the Philippines cemented its status as the darling of the emerging market bond universe overnight on Wednesday with the completion of a wide-ranging accelerated switch and tender into a new 25-year SEC-registered deal.
The Baa2/BBB/BBB- rated credit succeeded on a number of fronts, not least in overcoming choppy markets and choosing a stable day to complete Asia's first sovereign G3 bond of 2016 and the world's first sovereign long bond of the year.
More importantly, the Philippines has now been able to clean up and extend its maturity profile, as well as lock in low long-term rates at a time when US Treasury yields are close to 12-month lows.
Ultra low Treasury yields also means the sovereign has been able to achieve its lowest coupon on record despite the fact that the new $2 billion 3.7% 2041 deal has the longest maturity of its entire curve.
The exercise was a mirror image of a similar liability management exercise in January 2015, only this time on much a larger scale and in far more volatile markets. In terms of scale, the Republic offered up 16 bonds with $21 billion of aggregate notional value into the switch and tender offering compared to five bonds in 2015.
After the tender closed, it announced that it had accepted $1.5 billion in tenders from five bonds spanning 2016, 2017, 2020, 2032 and 2034 maturities.
Same demand as 2015
Bankers reported that total switch demand topped $4.2 billion when final price guidance was revised from 4% to 5 basis points (bp) either side of 3.75%. A further $8 billion of demand came from new investors. A total of 759 investors participated.
As a result, the final order book was very close to the $13.5 billion of combined demand the Republic achieved in 2015. This is a quite stunning achievement considering how much more difficult markets are in February 2016 compared to January 2015.
Then, the Republic received $1.23 billion in tenders, leading it to price a $2 billion January 2040 deal with a coupon of 3.95%.
Its success is testament to the fact that emerging market funds now view the Philippines as their safe haven asset, not a situation the country has found itself in for most of its overseas borrowing history.
Distribution stats show that 62% of the deal went to Asia (Philippines 48% and ex Philippines 14%) with 26% going to the US and 12% to Europe. In 2015, 50% went to the US, 41% to Asia and 12% to Europe.
By investor type banks predominated on 56% with funds taking 39% and insurers, corporates and sovereigns 5%.
Bankers said the high proportion of Filipino banks reflected the fact that they had bought up a lot of sovereign bonds over years and accounted for a high percentage of switch demand. EM funds were more heavily represented in the new money component.
The Philippines paid a new issue premium of between 10bp and 18bp, depending on where brokers were quoting the secondary market curve at the time of pricing.
One broker estimated the curve was worth about 1bp to 2bp per annum. Given one broker’s spot price of 3.51%/3.49% for the 2040 bond, this means the Philippines paid about 18bp over in yield terms.
Sales desks said the whole Philippines' curve had traded up about 0.25 to 0.75 points higher over the course of the day as momentum built up for the switch and tender offering.
However, a second bank estimated fair value around the 3.6% level.
Either way, the weighting of US-based emerging markets fund managers in the order book meant the Philippines needed to pay the kind of new issue premium they are accustomed to receiving from other emerging market sovereigns rather than the slim to non-existent premium Chinese issuers can get away with in Asia.
The best examples come from two other emerging market sovereigns, which priced on the same day as the Philippines. The Kingdom of Bahrain offered a new issue premium of 30bp before it pulled its tap while the Republic of Mexico paid a 25bp premium.
Trading through its peers
The Philippines deal appears to have been particularly well timed from the borrower's perspective since its curve has been on a tightening trend since mid-December.
Spread stability over the past few years, means global emerging market bond funds also tend to view the Philippines as a safe haven relative to its peer group. In the immediate run up to the deal this outperformance did show signs of turning with the 2040 bond peaking at a mid-price of 108.46% on February 11.
After another mini-rally on Wednesday, sentiment turned more negative again on Thursday with the whole curve trading back down to where it was before the switch and tender was announced.
However, the new 2041 performed well, trading up two points from its part issue price to the 102% level by lunchtime.
In its online roadshow, the country underscores just how stable and high performing its spreads have been compared to its peer group in recent years. One graph shows that its five-year credit default swap (CDS) spreads have traded in a tight band between 100bp and 138bp over the past two years.
As of February 16, they stood at 136.34bp.This places the country second only to Baa3/A-/BBB+ rated Slovenia, which is trading at 116.98bp.
Notably the Philippines has consistently traded through much higher rated credits such as Malaysia and Mexico since the end of 2014. On Feb 16, five-year CDS paper for A3/BBB+/BBB+ rated Malaysia was quoted at 195.5bp level, for example, while A3/BBB+/BBB+ rated Mexico was trading around 225bp.
In its online roadshow the Philippines concluded that it is "the standout credit amongst global emerging market peers."
It attributes its strong investor following to the huge efforts the government has made to improve overall governance since Benigno Aquino become president. A large part of the roadshow presentation is devoted to the recognition it has received in this respect.
For example, the Philippines has risen from 85th to 47th place in the World Economic Forum's Global Competitiveness Index and from 148 to 103 in the World Bank's Ease of Doing Business Index.
As Fitch said in September 2015, "The Philippines governance standards and business environment have improved markedly since President Aquino took office in 2010. Global Competitiveness as assessed by the World Economic Forum has now risen to a level commensurate with a BBB rating."
The agency currently ranks the Philippines at BBB-, one notch lower than Moody's and Standard & Poor's. However, Fitch has it on positive outlook suggesting an upgrade may soon be on the cards and potentially providing the new deal with ratings momentum as well.
One fund manager told FinanceAsia he also has a favourable outlook on the Philippines. "It will be less impacted by global volatility because it's very much a domestic growth story," he said. "Its economy is also buttressed by very strong US dollar remittances from overseas workers."
The net roadshow reveals these have risen from $10.7 billion one decade ago to $22.8 billion in the first 11 months of 2015.
Over the same period, the Philippines has also been able to transform its debt metrics and become far less reliant on overseas investors. Over the past decade national government debt as a percentage of GDP has fallen from 68.5% to 44.8% for instance.
Last year, the sovereign also sourced only 35% of its debt requirements from international markets compared to 42% in 2010.
Joint global co-ordinators for the new bond deal were Citi, Deutsche, HSBC and Standard Chartered. Joint bookrunners were Credit Suisse, JP Morgan, Morgan Stanley and UBS.
This story has been amended after final publication with updated distribution statistics.