The Philippines joins premier league of emerging-market sovereigns

HSBC's Stephen Williams explains why the Philippines stands out for establishing a borrowing strategy that has been steadily refined during the past decade.
Stephen Williams
Stephen Williams

Bankers covering the Republic of the Philippines (RoP) know not to take long Christmas holidays, that is, if they want to pitch for what is usually Asia's first international bond each year. In eight of the last nine years, the RoP has issued benchmark-sized US dollar transactions, and funded a large portion of the coming year's offshore funding requirements, before the Christmas decorations have come down on Ayala Avenue. In issuing early, and in executing well-judged transactions, the Department of Finance (DoF) has won a reputation that sees it on par with the likes of Brazil and Turkey in the premier league of emerging-market sovereign borrowers. 

This reputation has been hard won by a country which is a regular user of the capital markets. Over the course of the past decade, the country's borrowing strategy has been steadily refined, via a flexible mix of domestic and offshore borrowings every year. The main focus for offshore currency needs has been on the US dollar market, together with some diversification into euro and Japanese yen; and we have seen a variety of innovative domestic transactions predominantly in pesos. Average deal sizes in US dollars have increased and their frequency decreased: the RoP now typically targets one to two offshore benchmarks per year, usually of at least $1 billion or its equivalent in size.  All this has been combined with proactive liability management exercises in both the domestic and international markets. 

As bankers who have worked on RoP transactions will attest to, when the DoF decides to move, it moves very quickly. Requests for proposals are sent to banks often with a rapid response required, in order to minimise market noise and any possible reaction in spreads. Execution commences immediately post-mandate, with the transaction typically being launched within one to two days following a well-drilled preparatory process. There is usually no roadshow ahead of an issue to delay the time to market, with officials relying upon regular communications with analysts and investors to provide updates on the sovereign credit story. This swiftness in execution places the RoP among a small handful of Asian borrowers able to announce, launch and price a benchmark deal intra-day. 

This prowess was seen once again late last year, when the RoP printed a $1 billion 25-year bond (the first long-dated global bond from Asia in more than a year) at 6.425%, the lowest yield the country has ever paid on any long-dated US dollar benchmark financing. The deal was upsized in the first week of 2010 to $1.85 billion in a typically slick, well-received reopening. At the start of the decade, a similarly sized 25-year deal needed a yield of more than 10.5%. 

While the Philippines has rightly established a strong reputation in the offshore markets, kudos must also be given for their efforts onshore in developing the local currency market. Over the decade, there have been a number of firsts, including the first ever 25-year local currency bond in Asia; the Retail Targeted Treasury Bond in 2003, which raised Ps74.3 billion ($1.4 billion) and was the largest ever Asian local currency transaction at the time; and a synthetic $220 million bond (Peso bond and currency swap), which saved almost 300bp compared with direct US dollar funding. These and other transactions, all of which were well supported by both onshore institutional and retail investors, have provided a reliable alternative to foreign currency borrowing, especially in times of stress in the offshore market. 

With a new president taking the helm following the recent elections, investors are hoping for business as usual at the DoF. With the bulk of its offshore funding needs for this year already in the bag, the RoP can afford to pick its moment to return to the markets. When it does, it will look to further reinforce its hard won reputation as one of the region's savviest borrowers.  

Stephen Williams is head of debt capital markets for Asia-Pacific at HSBC.

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