The Philippines National Power Corporation (Napocor) pulled back from pricing a $500 million 10-year bond yesterday (Thursday) after failing to build a full order book and unable to stomach pricing at up to a 150bp premium to the sovereign curve.
As National Treasurer Sergio Edeza wryly reflects, "Even when we first went out with pricing guidance at 75bp over sovereign paper, the premium was already way too high. And we ended up with a situation where most investors were asking for 125bp to 150bp over. It just made no sense at all. We're better off doing a transaction on behalf of Napocor ourselves."
Edeza was the lead government official on roadshows and says that in many meetings, investors seemed far more interested in the sovereign's credit profile than that of the government-owned electricity utility, which has developed a reputation for being the credit that no-one can sell. Edeza says everyone involved has now learnt their lesson and in future the sovereign will raise funds to on-lend to the group rather than simply issue a guarantee.
In some respects, observers believe that Napocor, or the actual borrowing entity, PSALM (Power Sector Assets & Liability Management), was extremely unlucky and could have priced a deal had one been launched only two weeks earlier. As it was the Citigroup-led deal hit a marked change in market tone during the run-up to this week's FOMC meeting, which saw the Fed cut rates by 25bp rather than the hoped for 50bp.
As a result, Treasuries have backed up, emerging market spreads sold off and investors become far more credit sensitive. Over the past few days, there has been little consensus on whether the recent Asian bull run is over, but most agree that investors appear to be taking a wait-and-see approach.
This meant that any momentum Napocor hoped to generate by going out with relatively wide price guidance in the hope of tightening it back down again, backfired as sentiment went the other way. Having once talked of raising up to $1 billion, the base deal size was revised to a more realistic $500 million level and then downsized to $300 million on formal launch. Books are said to have closed around the $400 million level, although this was fairly meaningless given the enormous price sensitivity.
For government officials, this latest set back is likely to be viewed as a huge disappointment, since ROP spreads have held up fairly well over the last few days and performed strongly in the weeks following decisions by Standard & Poor's and then Fitch's to downgrade the sovereign from BB+ to BB. One month ago, for example, the Republic's February 2013 bond was quoted at 454bp over Treasuries. Yesterday, it was trading at 406bp over.
For Napocor, the deal's demise marks the third time in a row it has been unable to clear paper in the dollar market. The last time was in February 2002 when a $500 million seven-year deal led by Bear Stearns and JPMorgan proved uneconomic.
This deal was backed by a PRI guarantee (political risk insurance), which bumped the group one notch above the sovereign and encouraged the leads to hope for pricing up to 50bp through the sovereign curve. Investors on the other hand demanded a 60bp premium to the ROP, which when added to a 35bp guarantee fee, once again made a deal too expensive relative to pure sovereign borrowing.
Bankers have often questioned why Napocor keeps trying to launch transactions in its own name when investors clearly have the upper hand and can demand a large pricing premium. Many have also questioned the mandate process for the current deal, arguing that two to three bookrunners would have at least given investors some comfort about secondary market liquidity - another favourite bug bear with investors.
Getting banks to compete against each other and backstop the deal at ridiculously tight levels is also felt to have been counterproductive for a credit that needs to be carefully positioned and marketed. And while Citigroup has spent months developing Napocor's credit through an evolving series of mandates, it is said to have won the current deal by agreeing to backstop it at a 35bp premium to the sovereign.
"Yes this was an underwritten transaction," Edeza says. "But market conditions changed and everyone thought it would be better to do a book built exercise."
Edeza himself appears to remain relatively sanguine about the situation and says the sovereign does not need to rush back to the market and is unlikely to print another deal before the end of the third quarter. The sovereign set itself a $2.4 billion international funding target for 2003 and prior to the current deal had $900 million left to raise.
However, Edeza says this amount has now been taken care of because of the success of a retail bond offering, which has just closed with subscriptions of Ps63.75 billion ($1.2 billion). The government had initially targeted no more than Ps40 billion from the three and five-year deal.
He adds that Napocor still has $1 billion to raise this year, but $500 million is already in the works via an OPIC guaranteed deal and an ADB guaranteed deal. This leaves $500 million for the government to deal with.
" I think we have a lot of flexibility to do smaller, more strategic deals now," he concludes.
