ROP launches latest dollar linked notes tranche

Government sees overwhelming demand for third in the series of dollar-linked Peso notes.

The Republic of the Philippines pleased local bond market investors late last week with the launch of the third tranche from its US dollar-linked Peso notes (DLPN) programme. Deutsche Bank, Multinational Investment Bancorporation and Rizal Commercial Banking Corp. acted as joint financial advisors and lead managers for the Ps5 billion ($93.4 million).

It is claimed that the program, in which the payments on the notes are linked to movements in the US$-Ps exchange rate, is the first of its kind in Asia.

The third tranche has a tenor of three years and offers a coupon of 7.375%. Principal repayments, made semi-annually, will be in Pesos.

Previously, the Republic in November 2001 launched Ps7 billion of two and five year notes – yielding 8.5625% and 10.4375% respectively – and last December issued Ps5 billion of three-year notes at 7.5625%.

Local investors have clearly taken to the product, with the latest tranche upsized from Ps3 billion due to orders from 15 financial institutions reaching Ps16.2 billion. According to Susan Prado, head of debt capital markets and corporate coverage for Deutsche in the Philippines, investors are attracted by spread pick-up and the notes can also be used as part of hedging strategy.

"The issue offers a good yield comparable with other ROP bonds," says Prado. "Based on current secondary prices of sovereign bonds, tranche 3 was priced at approximately 30bp-35bp over those comparables. The notes can also be used as hedge against Peso depreciation. The investor is able to enjoy the returns of a dollar instrument while have the convenience of purchasing for Pesos.

Banks were the main investors at the primary level, and are joined in the secondary market by funds, wealthy individuals and corporates with foreign currency liabilities.

As far as the Republic goes, Prado says issuing PLDNs fulfills the joint goals of widening the type of product available to local bond investors, as well as reducing onshore demand for US dollars.

"The objective of the Republic is to introduce an innovative instrument into the domestic capital market," she explains. "This provides certain advantages, including broadening the range of investment avenues for a wider investor base for the Republic. It also reduces onshore demand for US dollars from investors intending to 'dollarize' their assets, and encouraging an increase in inward remittances and conversion to Pesos from overseas investors."