In January, the Philippines raised a record breaking $2.1 billion via a split $1.5 billion 25-year tranche and a Ç500 million 10-year tranche offering led by Citigroup, Credit Suisse, Deutsche Bank and UBS. Together, this represented the largest deal out of Asia since Hutchison Whampoa's multi-tranche fundraising in the autumn of 2003.
The Philippines needs $900 million to complete the remainder of its $3.1 billion in overseas funding target for 2006. At the beginning of the year National Treasurer Omar Cruz announced that the sovereign will raise no more than $3.1 billion from overseas debt issuance, noting that the balance of the budget deficit shortfall sourced from multi-lateral and FDI sources. This suggested that the sovereign would not seek to raise any additional offshore capital as pre-funding for 2007.
When the earlier deal priced, it did so in a market that was flush with liquidity and driven by investor demand for emerging market debt. The dollar-denominated tranche priced to yield at 7.785%, or 333.5bp over US Treasuries. The Euro tranche priced to yield at 6.375%, equivalent to 309.6bp over US Treasuries or 294bp over mid-swaps. At the time these deals actually priced inside the Philippines' own outstanding curve.
However six months later the market is telling a different story. Although tenor and structure have not yet been determined it is unlikely that any new deal will price so strongly.
Despite the Philippines position as AsiaÆs largest seller of offshore debt, the marketÆs recent volatility will have an impact on how the new deal is received by investors. The reason for that is twofold.
One, despite expectations that the markets are not in for a hard landing and that the current softening of the debt markets is a long overdue correction, this continued volatility is pushing many emerging market investors into increasingly risk averse positions. This implies that any new deal from a sub-investment grade issuer û as the Philippines is at a BB-/B1/BB- (Fitch) rating û will have to pay a premium that perhaps wasnÆt necessary six months ago.
Secondly, the sell-off of peso-denominated bonds in the domestic markets has also pushed out yields from historical lows. This sell-off is expected to extend to the offshore issues and weaken investor appetite for dollar-denominated or euro-denominated paper in the short term.
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