Bond mandates and launch schedules sometimes appear to be a movable feast in the Philippines and never more so than over the last few weeks. Uncertainty about the outcome of elections, ministerial re-shufflings and the fate of the Omnibus power bill, have thrown a number of timetables up in the air.
However, with sovereign credit spreads tightening by 100bp in just under a month, the Republic's three benchmark borrowers have become more attuned to taking advantage of market conditions while they can. PLDT, which used to be an annual fixture in the emerging markets calendar in late spring, is likely to return for the first time in two years this July, with a $500 million high yield offering.
According to market speculation, the 10 year deal has been mandated to Credit Suisse First Boston and HSBC from a shortlist that also comprised Citigroup, Deutsche Bank, Morgan Stanley and UBS Warburg.
Similarly, the National Power Corporation (Napocor) looks certain to make its last foray into the international markets as a government-owned entity in the same month with a $150 million to $300 million three-year deal. The request for proposals (RFP) went out yesterday (Wednesday), with submissions due by June 11.
As for the Republic, the completion of its 2001 fundraising requirement became slightly delayed last month after a change in the Secretary of Finance, with the current Energy Secretary Jose Camacho replacing the new Presidential Advisor Alberto Romulo. In place of the originally anticipated global bond offering, the Republic turned instead to the private placement market, with a roster of banks currently in the throes of bringing a series of small-sized and short-tenored deals to the dollar market.
Last Friday, CSFB completed a $150 million three year FRN at 305bp over Libor. About half a dozen core holders of sovereign paper were said to have invested in the deal. While the transaction was said to have been priced in line with the credit default market, some bankers concluded that it appeared aggressive relative to outstanding benchmarks.
The Republic's June 2002 deal, for example, is bid at 307bp over Treasuries, while an August 2004 bond by the Bangko Sentral ng Pilipinas' (BSP) is quoted at 412bp/376bp over. Assuming roughly 50bp for the swap, this would imply a 50bp cost saving for the Republic.
Likewise, JPMorgan is said to be lining up a tightly priced two-and-a-half-year FRN. Early spread talk for the $100 million deal is said to be 290bp over Libor, with launch provisionally scheduled for next week. Third in line is HSBC, which is believed to hold an informal mandate for about $250 million.
Where its global bond is concerned, the Republic is mulling one of three options for a deal that will now pre-fund its 2002 requirement. Bankers say that the government will either complete a non-deal roadshow in late June/early July, then launch a $500 million global bond in September, or it will scrap the non-deal roadshow altogether and simply aim for September, or if market conditions continue to improve, it will launch a bond off the back of the impending roadshow.
Banks mandated for the roadshow comprise HSBC for the Asian leg, Credit Suisse First Boston and Deutsche Bank for the European leg and JPMorgan and Morgan Stanley for the US leg.
These plans may yet change, however, after the new Finance Secretary takes office in mid-June. Few, for example, remain certain that the Treasury will retain control of international borrowing. Historically, three different departments have overseen the Republic's debt issuance to the detriment of any kind of clear or consistent strategy.
The International Finance Group (IFG) at the Department of Finance (DoF) and the BSP in particular, have been better known in recent years for their intense rivalry. Consequently, one of Romulo's key decisions has been to remove international borrowing from under the IFG and hand it to the Treasury, which also falls under the DoF and controls domestic borrowing. The IFG, meanwhile, continues to handle multilateral lending.
Given the government's strategic shift towards financing in its domestic currency and restrictions on Peso-denominated borrowing under the BSP's reserves management remit, the move seemed to make sense. For a bank like HSBC, which appears to have broken into the ranks of the sovereign's international house banks for the first time, it would also appear to underline the longer-term and wider benefits of establishing a strong franchise in Asia's domestic bond markets.
Napocor and the Omnibus Power Bill
The second key consideration to timing is the fate of the Omnibus Power Bill. Having failed to pass the bill by the end of a special congressional session finishing Wednesday, the government now says it hopes to see the bill passed during the four remaining days of regular sessions next week. Should this still result in an impasse, the legislation will then have to be completely re-considered when the newly elected Congress and Senate sits on July 23.
International bankers report that the market has priced in a more than a 50% expectation of the bill being enacted. Local observers, on the other hand, remain more sceptical.
"The Arroyo administration's determination to push this thing through after so many years of delay says a lot about its resolve," one banker comments. "If it succeeds, it will restore an enormous amount of credibility in the eyes of international investors and propel further spread momentum. I don't see an international bond being launched without it."
For banks preparing the Napocor RFP, however, the uncertainty does nothing to aide pricing considerations. Traditionally the group has traded about 25bp over the sovereign yield curve, although in the year since the government's exchange and tender offering for its debt, liquidity has completely dried up.
Those bonds that are quoted, are currently bid about 100bp wide of the sovereign. The power utility's December 2016 issue, for example, has a bid/offer spread of 635bp/599bp over Treasuries against a 516bp/510bp level for the sovereign's October 2016. Further down the yield curve, the sovereign's 2027 bond is quoted at 614bp, while Napocor's 2028 is quoted at 708bp.
Given the government’s guarantee of all Napocor's international borrowings and its assumption of its liabilities under the privatization plan, bankers argue that the shadow sovereign curve makes little sense. "It's also an extremely inefficient way to borrow," one country expert comments.
PLDT
Despite PLDT’s historic status as Asia's de-facto emerging markets borrower and its possession of an extremely well-defined credit curve, the forthcoming 10 year deal is regarded as a challenging one by a number of market participants. For the company, the deal marks a bold attempt to forestall further deterioration in its credit profile by terming out its heavy debt load.
Having been absent from the international dollar markets for two years because of its restructuring problems, the company divides market participants. On the one side, some bankers believe that investors will demand a full covenants package to compensate for refinancing risk, which peaks in 2003 when $629 million comes due.
The company's gearing is such that it had a debt/EBITDA ratio of 5.9 times at the end of 2000 and an interest coverage ratio of just under two times. Total debt stands at about $3.9 billion, with about $541 million estimated to be coming due during 2001 on a consolidated basis.
This argument is underscored by Moody's, which placed the company's Ba2 rating on negative outlook in April. In its ratings assessment, the agency cited PLDT's, "high level of debt, its refinancing risk and the general political and economic uncertainty in the Philippines.
"PLDT has limited capacity to reduce debt levels," it adds, "Because of significant ongoing capital investment, exacerbated by adverse movements in the Peso/dollar exchange rate and by costs associated with building its cellular business."
On the other side, however, many credit analysts view PLDT as a turnaround story with widespread appeal to the high yield market at a time of strong appetite for Asia's more established names. As Merrill Lynch fixed income research head Jason Carley writes in a research report published this week, "PLDT is a credit we would love to be able to recommend."
He says, "Having integrated the SMART acquisition quite well, the company is now generating very strong subscriber growth. Its cashflow position is solid and gradually improving. The company is also well managed in a difficult operating environment and in this regard, is a standout among the Asian high yield universe."
Carley goes on to say that Merrill's would recommend the company should it overcome its refinancing risk - which the current bond is just such an attempt to do - and bring some clarity to bear on how it intends to finance the GMA-7 acquisition. He concludes that the bank would re-consider its view should PLDT trade out to 200bp over the sovereign.
His counterpart at UBS Warburg, Stephen Cheng, has also recently published a report concluding that, "a re-rating of the credit may be justified when the long anticipated benefits start to materialise." Specifically, these are: an improvement in EBITDA buoyed by a strong performance from Smart; the completion of Piltel's debt restructuring and; clarity on the acquisition of broadcaster GMA-7.
"Our fair value target on the PLDT credit is 90bp to 120bp behind the sovereign credit," he notes.
In recent years, PLDT has tended to trade about 125bp to 175bp wide of the Republic and lags spread tightening or widening at the sovereign level. At Wednesday's close, the company's benchmark April 2009 issue was trading on a bid/offer spread of 658bp/627bp, compared to a 476bp/458bp bid/offer spread for the Republic's March 2010.
This deal, launched in April 1999 via UBS Warburg, was priced at 160bp over the then sovereign level on a yield of 540bp over Treasuries.
Currently some 182bp behind the sovereign, the bond showed a tighter 150bp differential back in March before the most recently rally. In addition, it lagged the Estrada-inspired downward spiral of autumn 2000, which saw sovereign 10 year spreads peak at the mid 700bp level in November and PLDT spreads peak at the high 800bp level just over a month later.
Should the company price in line with secondary market levels, it will almost certainly be looking at a yield of over 12%. Previously, its most expensive international bond has been its August 2004 transaction, which carries a 10.625% coupon.
Nevertheless, the strong tone to the Asian market, where a lot of PLDT paper is now thought to be held, in tandem with a low interest rate environment and positive credit news are three main drivers bringing it back to the dollar market. As fund management firm Income Partners recently concluded, PLDT can provide investors with, "defensive yield enhancement for a diversified portfolio."
First quarter figures have also shown an upswing. Smart, the Philippines largest cellular operator by subscriber numbers, recorded a 571% increase in operating EBITDA year-on-year to Ps9.1 billion ($185 million). Its other cellular operator Piltel also said yesterday that two years of debt restructuring will come to completion on Monday after meeting all conditions set by its creditors.
On the longer-term horizon, the company may also receive a second welcome cash injection from NTT DoCoMo, which is reported to be negotiating to take a strategic stake in Smart. Last March, PLDT successfully completed a strategic partnership with NTT. The Japanese telecommunications group now owns 15% in the company, while Hong Kong-based First Pacific, which took over a controlling interest in November 1998, owns 23%.
