The Republic of the Philippines (ROP) is seriously considering issuing its first inflation-linked bond, according to banking sources. If it goes ahead, it will make the Philippines the next country in the region to issue syndicated inflation-linked debt after Thailand and Hong Kong, which both successfully closed inflation-linked bonds in July this year.
Bankers have been pitching an inflation-linked bond, also known as a linker, to the Philippines for some time -- as early as last year in fact. But with global bond markets frozen shut, the sovereign is now looking at this with renewed interest. The ROP has not sent out a request for proposals and, given that this is still a relatively new product in Asia, it will take time to get a deal off the ground. But expectations are that it could launch next year.
“The Philippines has been listening to a lot of ideas and they have certainly been looking at the linker. They are intrigued by what Thailand has done and I think they are looking at different funding possibilities,” said one banker. “I think they are looking at this for next year though. It won't be a 24-hour execution, given that it’s a new product and they would need to get systems in place,” he added.
Similar to Thailand, the Philippines has strong onshore liquidity and bankers reckon that despite the global turmoil, the sovereign should be able to ratchet up support from onshore investors for a linker. Inflation has also been on the rise. The Philippines' headline inflation rose by 4.7% in August from a year earlier, easing slightly from a 5.1% rise in July.
Thailand has had success with its maiden linker. The kingdom closed its Bt40 billion ($1.3 billion) 10-year inflation-linked bond, which paid a coupon of just 1.2%, in July. About 62.5% of the bonds were allocated to domestic investors and the rest to international investors. HSBC, Kasikornbank, Krung Thai Bank and Siam Commercial Bank handled the deal.
The inflation-linked bond, which was offered to both institutional and retail investors, has also traded up since pricing, although it is not very liquid. It was issued at a yield of 1.2%, rallied to 1%, and was last quoted at 1.1%.
An inflation-linked note may also have additional appeal to the Philippine sovereign as other avenues are closed at the moment. The Philippines was planning to sell another global peso note in the second half of this year and it had mandated Citi, HSBC, Goldman Sachs, Standard Chartered, J.P. Morgan and UBS.
But like many other deals, the global peso bond is on hold now. The prospect of selling a global peso note -- which is denominated in pesos but settled in US dollars -- has become more difficult as investors have turned risk averse and pulled out of emerging market currencies such as the peso and the rupiah.
Its outstanding bonds are also currently trading underwater -- although so is most of the market, to be fair. The Philippines global peso note due in 2021 traded at a cash price of 96/97 yesterday while the ROP global peso note due in 2036 has fallen off the radar and was quoted at a wide bid-offer spread of 93/95 amid illiquid trading yesterday.
The Philippines is a frequent issuer in the global bond markets and has already tapped the market twice this year, with a Ps54.7 billion 25-year peso global in January and a $1.5 billion global bond in March this year.
Away from inflation-linked bonds, Philippine power company Quezon Power is conducting investor meetings for a potential US dollar bond. The company was in Manila yesterday and will be in Singapore today and in Hong Kong tomorrow. HSBC is arranging the meetings.
Citic Bank is also holding a non-deal roadshow in Hong Kong, Singapore and London with the help of HSBC and Royal Bank of Scotland.
