The Republic of the Philippines took advantage of a constructive credit market environment to complete Asia’s first sovereign G3 bond of 2019 on Monday, pricing its 10-year US dollar bond offering at a time when US Treasury yields are near their lowest levels in nine months.
The Baa2/BBB/BBB rated sovereign continued its recent practice of tapping the international bond market in the first two months of the year. Unlike in previous years, though, it did not conduct a concurrent tender offer for some of its outstanding bonds.
Manila will likely be satisfied it was able to raise $1.5 billion from the new issue, which was towards the higher end of the $500-million-to-$2-billion fundraising target announced late last year and double the amount of new money raised via a similar bond in February 2018.
Bankers reported that strong demand, which topped $4 billion, allowed the issuer to tighten the offering by 20 basis points over its initial price guidance of 130bp over US Treasuries when the deal opened on Monday morning in Asia.
Final pricing saw the SEC-registered deal print with 110bp over Treasuries to yield 3.782%, based on the 2.682% risk-free rate at the time of pricing and the 99.736% reoffer price.
To be sure, the actual borrowing cost to the Philippines sovereign is higher than the 3% 10-year note it issued last year. However, the new deal compares favourably once the 100bp increase seen last year in benchmark US interest rates is taken into account.
The new issue was also cheaper than secondary market levels as it was priced at 7bp inside its existing curve at the time of pricing.
In a research note, Moody’s said the Philippines had a positive economic outlook due to its large foreign exchange reserves and the low levels of external debt across its economy.
The rating agency expects the country’s real GDP growth to remain robust and for its fiscal metrics to strengthen somewhat as the government continues to make progress on its socioeconomic reform agenda.
“This transaction further illustrates deepening investor confidence in the Philippines’ growth story and the [Rodrigo] Duterte administration’s ability to maintain fiscal discipline while spending big on infrastructure modernisation, human capital development and social protection for the poor,” Finance Secretary Carlos Dominguez III said in a statement after the bond sale.
COOLING RATE HIKE EXPECTATIONS
Intriguingly, the Philippines has perhaps timed its sale better than the Republic of Indonesia, which printed a $3 billion triple-tranche bond offering early last month.
While many analysts have said that they expect the cost of funding for dollar bond issuers to rise this year, the impact has yet to be seen. On the contrary, 10-year Treasury yields are now about 20bp tighter than last month when Indonesia sold its bonds.
The risk-free rate is now at its lowest level since April last year after the US Federal Reserve hinted that it intended to ease up on the pace of interest rate tightening in 2019 due to signs of slower economic growth and the effects of the country’s trade spat with China.
The consensus view from analysts is that the Fed will raise US interest rates a further two times at most this year, down from four rate hikes in 2018.
In early Tuesday trade, the Philippines’ new note was trading at 100.044% to yield 3.745%, or 32bp higher than the reoffer price.
By investor type, 52% of the deal went to asset managers, 22% to banks, 14% to sovereign wealth funds, pension funds and insurance, and 12% to private banks and others. By geographical allocation, 37% went to Asia, 28% to US and 35% to Europe.
Bank of China, JP Morgan and Standard Chartered were joint global coordinators of the sovereign debt sale. Citigroup, Credit Suisse, Goldman Sachs and UBS were joint bookrunners.