The Republic of Philippines raised a $1.5 billion 10-year senior unsecured note on Thursday, the country’s first dollar note in two years and the third sovereign to hit global debt markets this week.
As part of the country’s liability management programme, the sovereign opted to execute the transaction differently, embarking on an “accelerated switch tender” – the first of its kind in Asia – which could pave the way for more to come to the market, believe syndicate bankers.
An accelerated switch tender is a process where the issuer offers to buy back its existing bonds at a specified bid price and replace them with new paper issued – a procedure that is commonly seen in the West.
This not only gives investors the option to sell their holdings of existing debt but also enables the issuer to reduce its cost of funding as well as generate substantial demand for the cash portion – the part of the bond offering that is not being tendered.
Also, compared to an outright tender, which normally takes 5-10 days to complete, an accelerated switch tender can be executed intraday. This gives bondholders motivation to participate as market and interest rate risks are reduced significantly, according to syndicate bankers.
Approximately $1 billion of the notes were tendered, while the remainder went to new cash accounts, according to a term sheet seen by FinanceAsia. The invitation for the tender expired at 4.00pm New York time on Thursday.
“The sovereign took the advantage to re-profile their curve on the back of being upgraded,” said the source. “For the Philippines, the value here for them is that they have a huge savings in terms of reducing high coupon debt. Also as part of its liability management programme, the country also chose to extend tenor and clean the curve up by issuing a 10-year note.”
For example, existing 2024s with a coupon of 9.5% as well as 2015s with a coupon 8.875% were replaced by the Philippines’ newly issued SEC-registered bond, which offers an annual coupon of 4.2%. Clearly, the sovereign was able to cut its costs substantially.
All this was possible thanks to its recently obtained investment grade ratings. In March 2013, Fitch gave the Philippines its first investment grade rating. Standard & Poor’s and Moody’s Investors Service followed suit in May and October last year, respectively.
“The proposed debt issued is backed by the full faith and credit of the Philippines,” said S&P in a separate statement on Thursday after assigning the sovereign’s dollar-denominated global bond due 2024 an expected rating of BBB-, which reflects an investment grade rating.
The transaction received a whopping order book of approximately $13.5 billion from about 500 accounts. US investors were allocated 53% of the notes, Asia 28% and Europe 19%. Fund and asset managers subscribed to 71% of the paper, while banks took 24% and insurance companies 5%.
The degree of success that the Philippines obtained from its recent issuance in the form of a switch tender will set the scene for more to come, with likely candidates being other sovereigns – especially those with a high level of indebtedness – as well as quasi-sovereigns, note experts.
“When anybody is engaging in liability management, what you really want to look at is being able to ensure that your exit financing is competitive,” said a Singapore-based debt syndicate banker.
The Philippines’ latest bond was trading well in secondaries, up one point to 101 from par shortly after being priced.
Deutsche Bank, HSBC and Standard Chartered were the global coordinators and joint bookrunners of the Philippines’ deal. Other joint bookrunners include ANZ, Citi, Goldman Sachs, JPMorgan and Morgan Stanley.
