Switched on! Philippines pushes out curve

The Southeast Asian country became the second sovereign to issue a dollar bond this year, swapping 14 old bonds for a new 25-year note.

The Republic of the Philippines priced a $2 billion 25-year bond on Thursday morning, taking a proactive approach to lower its dollar funding cost amid widespread expectations of US interest rate hikes later in the year.

The consensus view among analysts is that the US Federal Reserve will have three quarter-point increases for 2017. That is up from two 25bp hikes in the past two years, and has prompted Asian issuers in the dollar market to raise funds or refinance their debt early.

Few issuers can do that with such flexibility as the Philippines. As part of the country's liability management programme, the Baa2/BBB/BBB -rated sovereign restructured $1.5 billion of its old bonds into a new 25-year bond that priced at to yield 3.7% — or just 66.7bp over the US Treasuries, according to a term sheet seen by FinanceAsia.

The SEC-registered sale was launched a week after South Korea sold its first dollar bond in more than two years, raising $1 billion from a 10-year note that pays 55bp over US Treasuries.

The Philippines' funding exercise was designed to take out some of its more costly bonds and replace them with a long-dated bond. After the tender closed, the sovereign accepted $1.5 billion in tenders for 14 bonds with maturities spanning between 2019 and 2037, representing 6.1% of the outstanding bonds by nominal value, according to a syndicate banker.

Before the release of final guidance, the Philippines had received more than $3 billion of demand from the 'switch' offering, with a further $4.5 billion from new investors. A Singapore-based fund manager said the sizeable orderbook reflected the scarcity of sovereign bonds this year and the sheer abundance of liquidity among some investors.

"The demand for sovereign papers has steadily increased after last year's global bond rout that wiped out more than $1 trillion due to Trump's election," he added.

The big demand the sovereign generated from new and old investors alike meant a bigger deal was potentially on the table. But funding officials in the country told bankers to stick to their original target, in part because increasing the deal from $2 billion would have required a new approval process.

The Philippines went out with an initial price guidance at 3.95% area on Wednesday morning, before tightening the deal to between 3.7% and 3.75%. Final pricing of the February 2042 bond was priced at the tight end of 3.7%.

The best comparable was its outstanding 3.7% March 2041 bond, which was trading on a cash price of 101.125 to yield 3.629%. That meant the new deal was priced inside their secondary curve.

Fund managers were allocated 68% of the bond, insurance companies 12%, central banks, sovereign wealth funds and agencies 11%, and banks 7%. The remaining 2% went to corporates and others. By geography, Europe took 43%, Asia 33% and US 24%.

CitiCredit SuisseDeutsche BankStandard Chartered and UBS were the global coordinators of the new bond and were joint dealer managers of the tender offer.

The Philippines pulled off a similar switch offer last year — doing enough to win FinanceAsia's award for best sovereign bond in the process.

¬ Haymarket Media Limited. All rights reserved.
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