International investors placed close to $6 billion of orders yesterday for a debut bond offering by the Philippines' state-owned Power Sector Assets and Liabilities Management Corp (Psalm) -- six times the amount of paper on offer.
The strong demand was driven by a recent spike in optimism in the credit markets and by Psalm's government guarantee, which combined to allow the company to print the 10-year bonds at the tight end of its price guidance. The final price was fixed early yesterday morning Hong Kong time and represented a yield of 7.375%, or 412.3bp over 10-year Treasuries.
The lack of issuance in the market, in spite of the improved sentiment, also helped Psalm to attract orders. "Investors are quite keen to get involved in new deals," said one banker. "There's no liquidity in the secondary market so it's really the only place where investors can express their views and get meaningful allocation in one shot, which means that issuers don't need to leave too much on the table to get deals done."
Other issuers are now expected to follow in the hope of closing deals while the market window is open. Korean utilities such as Korea Gas Corporation and Korea Railway are expected to mandate deals soon, and so is Indonesian power producer Perusahaan Listrik Negara (PLN).
Psalm's apparently tight pricing still allowed a nice pick-up over comparable dollar bonds issued by the Republic of the Philippines. The ROP June 2019 bonds are currently yielding around 6.23%, which means that buyers of yesterday's Psalm bonds enjoyed a spread of around 114bp over the closest sovereign. The two issuers are essentially the same risk.
By way of comparison, the November 2016 bonds issued by National Power Corporation, a related state-owned utility, are trading at around 85bp over the government's October 2015 bonds and have generally traded within a band of 90bp to 125bp.
One debt capital markets banker in Hong Kong said that such guaranteed bonds typically trade at around 100bp over the sovereign and added that this was also the target price for Psalm. And, taking a halfway mark between the government's January and June 2019 bonds, that is roughly where it priced.
Indeed, some guaranteed bonds trade at much bigger spreads. Hana Bank, for example, is around 150bp wider than Korean government paper.
Deutsche Bank, HSBC and Morgan Stanley underwrote the deal, which was rated at the same level as the Republic of the Philippines (BB-) to reflect the fact that the deal is guaranteed by the government.
A total of 237 investors bought the deal, with 24% from the Philippines, 31% from the rest of Asia, 28% from the US and 17% from Europe. The accounts were mostly fund managers, who accounted for 50% of the allocation, with the rest going to banks (29%), insurers and pension funds (10%), retail (7%) and central banks (4%).|
The bonds also traded well in the aftermarket yesterday, tightening to around 101 from their pricing level of 99.127, providing further evidence of the demand in the market for primary issuance.
The company has said that it will use the funds for debt refinancing and working capital.