The Republic of the Philippines issued a landmark deal early Friday morning when it priced its debut global peso bond. The Ps44.1 billion ($1 billion) long-dated 10-year deal is denominated in Philippine pesos, but settled in US dollars with all payments indexed to the peso spot rate.
The notes will mature on January 15, 2021 and pay a 4.95% semi-annual coupon, which is the lowest coupon on record for a 10-year Philippine sovereign, whether denominated in pesos or dollars. The bonds were re-offered at 99.607 to yield 5%. The pricing was based on an exchange rate of 44.109 pesos per dollar and the notes were rated Ba3 by Moody’s and BB by Standard and Poor’s.
The Philippines is a frequent and experienced borrower both in its local currency market and in the offshore dollar market. However, with favourable peso-dollar exchange rates, the Philippines saw the opportunity to issue a global peso security and target an investor base that may not typically have access to local currency bonds in the domestic market.
With emerging market funds in local currency, hard currency and hybrid funds all seeing record inflows this year, one banker noted that the timing of the deal was "auspicious”.
According to Bloomberg data, 10-year government peso bonds yielded 6.5% last Thursday when the deal was announced, which is equivalent to a spread of 145bp over Treasuries -- a drop of more than 100bp from a year ago. The peso has risen by 9.3% in the past 12 months and is expected to climb another 3.2% to Ps42.90 per dollar by the end of next year, according to forecasts compiled by Bloomberg.
“What the sovereign was trying to achieve was to offer an asset to a global investor base that finds it difficult to get exposure to peso and Philippine rates,” explained one banker, noting that these investors may not hold an onshore custody account or may potentially have counterparty issues with local custodians.
Bonds issued in the local peso market also come with a 20% withholding tax, which isn't the case for deals issued off shore. However, on this particular deal, the yield has been lowered by a corresponding amount, meaning there is no arbitrage opportunity. Even so, offshore investors were attracted to the deal because it allows them to bypass the procedures that are required to buy a local bond, explained one source familiar with the deal.
“It’s a mirror of the exposure and they don’t need to raise any Philippine liquidity to buy,” he said.
“If investors want a meaningful allocation, they will have a tough time getting it in the domestic market,” added another source.
Taking advantage of this, the deal attracted an order book of $13.5 billion from over 280 accounts. As a reflection of offshore accounts swarming to the deal, the distribution was fairly even across the regions – with 37% going to Asia, 31% to Europe and 32% to the US. Fund managers took 81%, banks 10%, central banks 3%, insurance companies 2% and retail investors the final 4%.
Given the huge demand, some investors came away feeling like they had been under-allocated.
"Allocation was not stellar for anybody,” said a source, “and with a $13.5 billion order book, most investors were somewhat disappointed with how many bonds they got.”
As a result, even though the bulk of investors were described as being “buy and hold”, there was movement in the secondary market as investors tried to top up their holdings and the notes traded up more than one point during Friday’s session in Asia.
As there were no direct comparables, the bookrunners looked at the domestic rate, net coupon and net yield as key reference points. Another gauge was the local Philippine bond curve minus the 20% withholding tax.
The Philippines is one of the more sophisticated sovereign borrowers in Asia, having accessed the international markets three times this year -- the dollar market twice with a $1.5 billion dual-tranche deal in January and a $750 million tap in July; and the Japanese yen market once with a ¥100 billion ($1.016 billion) bond.
The Philippine government said the proceeds from this latest bond will be used for general purposes, including budgetary support.
Citi, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC and J.P. Morgan were joint bookrunners for the transaction, with Citi and Deutsche Bank acting as global coordinators.