The Philippines, masters of timing

The sovereign finds a market window to price its long-awaited $500 million bond deal, achieving tight pricing and good secondary performance.
The Republic of the Philippines priced its long-awaited $500 million sovereign deal late on Tuesday evening in a transaction that was praised by rival bankers for its speed of execution and the pricing levels it managed to achieve.

The deal, managed by Credit Suisse and Deutsche Bank, priced 9bp back in yield terms from the existing 2032 bonds, closing ôwith the least discount possibleö, according to an investor who participated in the transaction. ôAs usual, the Philippines are masters in timing,ö he continued.

The bonds came at a yield of 6.54%, and a cash price of 98.

The trade - a tap of the PhilippinesÆ existing 2032 bonds - priced just ahead of the Federal Reserve's announcement on interest rates, which was due in the early hours of this morning. It also came in a market that on Tuesday, for the first time in two weeks, saw both asset classes (equity and credit) aligned across the three time zones, according to a market specialist. The deal was completed in 12 hours, with the books open for five hours in Asia, and one and half hours in Europe and the US, thereby minimising execution risk.

The scarcity value of the bonds played a big part in the success of the deal, since the sovereign announced early this year that it would limit its offshore borrowing to $500 million in 2008. As a result, despite a book that was nine times covered ($4.6 billion), the deal size was not increased, providing good clarity to the market. Moreover, the announcement last week that MoodyÆs had changed the Philippines rating outlook to positive from stable nudged cautious investors to take a chance on a credit that enjoys strong fundamentals.

ôThe leads adopted a good strategy, suited to these markets,ö says a banker away from the transaction. ôThey announced the trade and then waited to see its impact on the secondary market. Once it had settled, they issued an initial guidance which led to heavy levels of subscription. This then allowed them to revise guidance up by half a point.ö

Initial guidance was released at 97.375, with a yield of 6.59%, and later revised to 97.875 (+/- 0.125) with a yield of 6.55%.

ôThey probably lost some demand at this stage, but still managed to price at the tight end of guidance,ö the banker adds. "Moreover, execution was fast. This is crucial to successful trades at the moment."

A technical bid also worked in the issuerÆs favour. According to sources, some investors had a number of short positions on the existing 2032 bonds, which were trading tight in the repo market. This means that it was expensive to borrow those bonds, and the short positions were costing investors money. This latest transaction allowed investors to buy the bonds and close the short positions.

ôThe Philippines tapped an issue that was squeezed by shorts, so it was a sensible issue to tap,ö says an investor.

Moreover, the deal also benefited from a strong domestic bid. Concerns that some local investors may have to downsize their portfolios to reduce exposure to dollar debt has been addressed recently by the governmentÆs proposal to issue warranties to its foreign-currency bondholders, reducing potential selling pressure as a result of the credit crunch. Out of the 44% allocated to Asia, 20% were placed domestically in the Philippines.

ôThere was a strong Asian bid, which is always good to see. The deal was timed well and priced tight, and the bonds performed well in the aftermarket. It was a nice trade,ö says a rival banker.

The bonds were trading yesterday evening at 98.25/98.5, having performed weaker in the afternoon following reports from UBS, BNP Paribas and Merrill Lynch, but never traded below the re-offer price.

The success of the transaction doesn't mean we'll see a rush of issuance though. "This transaction shows that investors, despite their nervousness, are able to consider emerging market sovereigns rationally since this asset class has exhibited low correlation to the rest of the credit markets," says a market observer. "But it won't impact the $20 billion-worth of deals currently in the pipeline, waiting to come to market."

Please refer to the pricing terms published by FinanceAsia on January 30 for full pricing details.
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