ROP is going Japanese

The Republic of the Philippines has mandated Daiwa and Nikko Salomon Smith Barney for a Y70 billion bond.

The Republic of the Philippines is planning to re-enter the Samurai market next month with its first transaction in nearly four years. Daiwa and Nikko Salomon Smith Barney have been mandated for a Y50 billion to Y70 billion (roughly $500 million to $700 million) offering which may complete the government's official funding requirements for the year.

Diversification into yen at a time when a number of emerging market borrowers have been able to successfully tap the sector has been applauded by observers. The strategy also makes sense in the light of the Republic's recent borrowing history, which has been marred by a messy $1.6 billion offering in the dollar market in February and an aborted $700 million equivalent deal in euros two months later.

Launch of the deal is expected in July and depending on investor demand will either comprise one five year tranche, or a split tranche five and seven year deal.

Hopes for the deal are high. As one banker put it: "The Samurai market is performing well at the moment. There have been a number of emerging markets deals recently and close ties between Japan and the Philippines should give this transaction an extra edge."

Attractive alternative

For the Philippines, the deal not only offers a welcome alternative after its recent and largely unpleasant brushes with global investors, but also an attractive one. Japan's low interest rate policy also means that the headline cost to the borrower will be low, while domestic investors should be tempted by a higher yielding alternative to domestic instruments.

In the dollar market, for example, the Philippines benchmark 2008 bonds and 2010 bonds are trading at bid/offer levels of respectively 460/450bp and 480bp/475bp. In coupon terms, the two deals pay 8.875% and 9.875%. By contrast, the government's outstanding Y30 billion 2003 maturity (issued in the name of government-owned Development Bank of the Philippines) is trading at a spread of 150bp over Yen-Libor, equivalent to about 180bp over dollar-Libor.

Japanese experts argue that any new five year deal is likely to have a coupon above the 3% level. In this respect the most recent benchmark has been provided by Mexico, rated one notch higher by Moody's at BB+/Baa3. In a Y50 billion deal also led by Nikko Salomon Smith Barney and Bank of Tokyo Mitsubishi, the sovereign paid an aggressive 2.6% for a five year offering that yielded the equivalent of 125bp over Yen-Libor.

Opportunistic borrowing

The Philippines' original deal, launched in August 1996, was seen as an opportunistic move by the government in response to the assignment of a first time investment grade rating of BBB- by JCR. Although the Republic has also long hoped to receive a coveted investment grade rating from the two US agencies, it has yet to do so. And observers believe that it may remain stuck at its current BB+/Ba1 ceiling for some time to come. Disenchantment with the Estrada government, failure to implement structural reform, an inability to control the budget deficit and frequent eruptions of cronyism have all dented the credit's appeal in the international markets.

However, while the Republic's spreads widened markedly over the first five months of the year, there has been a noticeable tightening in recent weeks. Traders report that the Republic's 2010 issue, for instance, has risen from an offer price of 77.0 to 84.0, equating to a roughly 130bp contraction in spread terms.

PNOC Shibosai

A new Samurai is also likely to be boosted by the successful completion of a Y22 billion shibosai by the government-owned Philippines National Oil Corporation Energy Development Corporation (PNOC-EDC). Under the lead of joint arrangers Bank of Tokyo Mitsubishi and Nomura, a 10 year private placement transaction was priced at par early this week.

Yielding 2.37%, equivalent to 40bp over Yen-Libor, the deal's tight pricing derives from its partial guaranteed by the Japan Bank for International Co-operation (JBIC). This represents the first, and some believe, the last time that JBIC will issue such a guarantee under the new Miyazawa plan.

Bankers commented that pricing is comparable to an outstanding 10 year dollar transaction in JBIC's own name, currently trading around Libor flat. The premium between the two deal is largely a reflection of the fact that PNOC's deal is only effectively 87% guaranteed by JBIC, with the remainder representing pure Philippines' risk. Under the terms of the guarantee, JBIC will guarantee the last five years of coupon payments and principal risk.

Bankers said that books were strongly oversubscribed, with about 50% of placement to insurance companies and the remainder to a mix of asset managers, banks and credit federations.

"The involvement of credit federations is particularly interesting," one banker commented, "because they have not traditionally been large buyers of Samurai paper. But recently, we have been seeing ever increasing numbers show interest in deals like this.

"Where PNOC is concerned," he adds, "up to 40% of the deal in terms of investor numbers went to the sector." 

PNOC used a shibosai structure because JBIC does not want to see any of its contingent liabilities traded in the open market. Under the new Miyazawa plan, the Philippines itself was also scheduled to complete a similar offering, but having waited some months for Japan to come up with guidelines concerning the guarantee, has now opted to launch a deal on a stand-alone basis.

Samurai dreams

For the last couple of years the Samurai market has effectively been closed to the emerging markets sector. Having hit a high of Y3.7 trillion in 1996, overall volume was down to only Y205 billion by 1998. A widening of the basis swap made it difficult for foreign borrowers to swap proceeds out of yen, while investors seemed more interested in buying foreign currency bonds than those on their own doorstep.

This year, however, the basis swap has improved by about 40bp and investors have shown far more enthusiasm for Yen-denominated offerings.

Subject to final pricing, most bankers believe that a sovereign bond from the Philippines will be well received. As one banker concluded, "There has been little supply from Asia in the Samurai market and generally investors feel that it makes more sense to buy paper from countries in the region rather than Latin America and Eastern Europe."