Why BSP opted for a loan instead of a bond?

BSP has decided to issue a syndicated loan instead of a bond causing a bit of a flutter in banking circles.

Earlier this week, the Philippine central bank, Bangko Sentral ng Pilipinas (BSP), awarded the mandate for a $500 million five-year syndicated loan to a group of seven banks. BNP Paribas, DBS Bank, ING Bank and Standard Chartered are the foreign banks, while BPI Capital, Metropolitan Bank & Trust Co and RCBC Capital are the domestic banks forming the syndicate. The deal is in process and expected to be closed tomorrow at around 220bp over Libor, equivalent to about 250bp over Treasuries.

BSP is looking to pre-pay $740 million of another syndicated loan it borrowed in March last year. The existing loan matures in 2004. By borrowing at rates that would be cheaper than its existing loan, BSP is attempting to save costs and with interest rates appearing to have bottomed out, BSP is making the most of this opportunity to refinance its existing loan.

It is common knowledge that BSP had sent out RFPs for both a bond deal and a loan deal. However, the news of BSP going ahead with the syndicated loan deal has caused a bit of a flutter in the banking circles. Market observers believe that for the BSP to tap a syndicated loan instead of a bond, the pricing of the loan should be considerably tighter than the bond.

Traditionally, although the BSP is considered a sovereign entity, its bonds have priced and traded at a 15bp-30bp premium to the sovereign. BSP's November 2005 issue currently trades at 320bp over two-year treasuries. The sovereign itself has an April 2008 bon, which is trading at 303bp over five-year Treasuries. Therefore, if BSP had decided to tap the bond markets it would have had to pay a spread in excess of 300bp. The issue would also have been well received, especially by Philippine domestic banks that are flush with liquidity, and also given the performance of Philippine dollar bonds in the past week.

Loan bankers argue that BSP opted for a loan because of the competitive pricing, flexibilities and prepayment options available with it. The syndication process is said to be proceeding well and market sources indicate that BSP may upsize the deal to $740 million.

However, the major reason why it has opted for a loan rather than a bond is to avoid crowding out the market. With up to $1 billion of supply waiting in the wings to fund Napocor, the sovereign is acutely aware that additional supply may pressure the spread curve.