The Republic of the Philippines has once again leaped straight out of the gates to issue Asia's first sovereign bond in 2010. The sovereign raised $1.5 billion on Wednesday through a dual-tranche SEC-registered deal that was jointly arranged by Barclays Capital, HSBC and Deutsche Bank. The 10-year tranche attracted $5.3 billion worth of demand from 215 orders, while demand for the 25-year tranche amounted to $4.6 billion split across 205 orders.
The deal was a reopening of two securities that were initially sold in January and October of last year and comprised $650 million of 6.5% bonds maturing in January 2020 and $850 million of 6.375% bonds maturing in October 2034. The new issuance will bring the total size of these two bonds to $1.4 billion and $1.85 billion respectively.
The 2020s were priced at 106.25% of face value to yield 5.674%, or an equivalent of 183.7bp over US Treasuries. The 2034s were priced at 96.5% to yield 6.664%, or an equivalent of 195.7bps.
The bonds traded softer in the aftermarket yesterday, but were in line with other regional sovereigns on the back of generally weaker sentiment for credit markets and high US Treasury yields. According to market participants, the yield on the 2020s widened by 3bp, while the yield on the 2034s widened by 5bp.
As has been a common theme with these long-dated bonds, US participation was dominant and 35% of the 10-year tranche and 40% of the 25-year tranche was allocated to US investors. There was also strong demand from real money accounts in both the US and Europe.
That said, sources close to the deal noted that a strong domestic bid -- Philippine investors were allocated 23% and 19% of the 10- and 25-year tranches respectively -- provided solid anchor support for the deal. Outside the US and the Philippines, 17% of the 10-year bonds went to Europe and 25% to Asia. European investors also bought 20% of the 25-year bonds, while Asian investors took 21%.
With respect to investor type, the 10-year was divvied up with 56% going to asset managers and hedge funds, 31% to banks, 10% to insurance/pension funds and 3% to retail. A similar distribution was made for the longer-dated issue, which saw 50% sold to asset managers and hedge funds, 34% to banks, 11% to insurance/pension funds and 5% to retail.
It comes as no surprise that the proceeds will be used to finance the Philippines' growing fiscal deficit and the issue is expected to cover approximately 20% of the projected shortfall for 2010. In a press release, finance secretary Margarito Teves stated that the proceeds will go towards "funding [the Philippines'] urgent requirements for infrastructure and the reconstructive efforts".
Last year Fitch estimated the Philippines' deficit to be 4.1% of GDP or Ps324 billion ($7 billion). Fitch assigned the new deal a BB rating.
The Philippines also has stable ratings from Moody's (Ba3) and Standard & Poor's (BB-), although both agencies recognised the inadequate revenue base, particularly taxes, and large debt overhang from the public sector as areas of concern. Moody's said such issues would leave, "government finances vulnerable to domestic policy slippage, or external shocks, such as a rise in global inflation". Moody's last upgraded the Philippines in July 2009, from B1 to Ba3.
With elections scheduled for May 2010, the Philippines could well be under new administration by June. This will certainly be a point of interest for rating agencies and borrowers alike over the coming months. Standard & Poor's, in particular, said that the sovereign credit ratings could be raised if there is "enough evidence of renewed focus on fiscal consolidation and revenue improvement".
In spite of its pending elections, the Philippines has thrown the gauntlet to the other prominent players in the Asian bond market, with its $1.5 billion tap being quite a sizeable benchmark to follow. It is anticipated that Indonesia and Vietnam will be next to issue sovereigns in the near future. According to media reports this week, Indonesia plans to sell $4 billion of US dollar-denominated bonds, while Vietnam may raise $1 billion.
