The Republic of the Philippines priced a $2 billion 25-year offering early on Wednesday morning — the first Asian sovereign to do so in 2015 — beating Indonesia to it as Treasury yields continue to hover at low levels.
ROP priced its US SEC-registered bond at a yield of 3.95%, around 25bp tighter than its initial price guidance area, according to a term sheet seen by FinanceAsia.
As part of the country’s liability management programme, the note comes with a switch tender offer. This is where the ROP offers to buy back a series of existing bonds at a specified bid price and replace them with new paper issued — a procedure that is more commonly seen in the West.
This not only gives investors the option to sell their holdings of existing debt but also enables the issuer to reduce its cost of funding as well as generate substantial demand for the cash portion — the part of the bond offering that is not being tendered, said a source close to the deal.
As a result of this switch tender strategy, combined with the low US rates environment, the issuer was able to re-price its overall cost curve, added the source.
"The issuer achieved pretty extraordinary levels of pricing," said the source, adding that last January the ROP raised a 10-year bond at a yield of 4.2%. "It's clear that the borrower is disciplined with taking inefficient bonds from their portfolio and extending the maturity of the curve."
Ten-year US Treasury yields fell to 2.02% on Tuesday — the lowest closing level since May 2013 — from 2.123% on Friday, according to Bloomberg data.
Approximately $1.23 billion of the notes were tendered, while the remainder went to new cash accounts, according to the term sheet. The invitation for tender expired at 4pm New York time.
The old bonds that were used to exchange with the new ones include the long-tenor 7.75% notes expiring in January 2031, 5.5% paper due March 2026 and 4% maturing in January 2021. As for the shorter duration ones, 8% bonds due January 2016 and 9.375% notes maturing in January 2017 were swapped as well.
ROP's deal comes ahead of the Republic of Indonesia, which also has intentions to tap international debt capital markets for funding in 2015. The ROI plans to frontload its bond sales denominated in US dollars, euro and yen this year ahead of the expected US rate hike.
Indonesia, Asean’s biggest economy by GDP, plans about Rp450 trillion ($437 billion) of debt issuance in international and local bond markets this year, similar to 2014’s record-breaking level, Robert Pakpahan the director-general of the Finance Ministry’s debt management office said at FinanceAsia’s biannual Borrowers’ and Investors’ Forum in October.
Last year, ROP was also one of the first Asian countries to tap the international debt market. Last January, it raised a $1.5 billion 10-year senior unsecured note — also part of a switch tender offer — and was the third sovereign to do so after Sri Lanka and Indonesia.
ROP received a total orderbook of $13.5 billion for its latest offering, majority of which went to fund managers (61%), according to a source familiar with the matter. The source added that the switch tender offer portion received over $5 billion in interest.
Financial institutions subscribed to 32% of the notes, followed by insurance and pension funds 4%, central banks 2% and private banks 1%.
US investors bought nearly half of the bonds, followed by Asian investors with 41% and European investors with 12%, the source added.
In secondary markets, ROP's offering has traded up from par to 102, according to Bloomberg bond prices.
Deutsche Bank and HSBC are the joint global coordinators and bookrunners to ROP’s transaction. Other joint bookrunners include Citi, Credit Suisse, Goldman Sachs, JP Morgan, Morgan Stanley, Standard Chartered and UBS.