The Republic of the Philippines took advantage of a market window late on Monday to raise $750 million from a tap of its 8.875% March 2015 bonds and 9.5% February 2030 bonds. Both tranches were considered a success by the market after attracting respective order books of $1.4 billion and $2.2 billion, plus the renewed participation of real money accounts.
However in order to draw the investors back, the B1/BB-/BB rated credit realized it needed to be relatively generous with pricing. It consequently priced both taps at a higher discount than the half dozen or so taps it completed in 2004.
The 2015 bonds were re-opened at 101.375% to yield 8.661% or 438.5bp over Treasuries. This represented a 1.125 point discount to the bond's 102.5% mid spread earlier that morning when the deal was announced.
The 2030 bonds were re-opened at 97.875% to yield 9.762% or 510.5bp over Treasuries. This represented a 1.375 point discount to the morning's 99.25% mid-spread.
During 2004, the Philippines priced its taps in a range of one to 1.25 point discounts. In September 2004, for example, it similarly re-opened a 2015 bond and a 2030 bond. These were priced at discounts of one and 1.25 points to the prevailing secondary market levels at launch.
The Philippines policy of tapping its existing bonds has consistently drawn fire because short selling, which ensues always means the bonds always trade down prior to launch in the process widening the new issue premium the borrower needs to play to clear the market. In this case both the 2015 and 2030 bonds are said to have fallen between 1.125 and 1.5 points between Friday and Monday thanks to rumours of a new tap and rising Treasury yields.
The later rose on average 10bp after stronger than expected non-farm payroll numbers and an announcement from the US Treasury that it intends to resume issuance of 30-year bonds. The two taps were priced off US Treasury yields of 4.276% (2015) and 4.621% (2030).
Nonetheless bankers believe the Philippines has confidently re-opened the Asian new issue market and has put it back on the same footing it was in mid April, just before the Republic of Indonesia completed its disastrous $1 billion sovereign bond.
The new funding team at the ROP first mandated Deutsche Bank, HSBC and JPMorgan for a twin headed tap on April 13, the day that Indonesia priced. At this point the 2015 was trading at 102.1% to yield 8.55% or 417bp over Treasuries and the 2030 at 98.13% to yield 9.70% or 502bp over Treasuries.
In the interim period, both bonds widened about five to seven points before recovering back to April 13 levels late last week at which point a decision was taken to re-launch. So too, the leads appear to have used the intervening month to successfully negotiate marginally higher fees than the zero fee level two of their number are said to have won the deal at.
These now stand at 4bp for the 2015 tap and 5bp for the 2030 tap. It remains uncertain whether the leads are also still absorbing all of the issuer's costs.
Back in September 2004, the Republic paid 6bp for its 2015 tap and 12bp for its 2030 tap.
By the end of Tuesday's trading day in Asia both taps had traded up, with the 2015 quoted at 102.25% to 103% and the 2030 at 99% to 99.75%.
Traders reported continued secondary market buying from real money accounts. A total of 122 accounts participated in the 2015 tap and 146 in the 2030.
By geography, the 2015 saw 34% placed in Asia, 24% in Europe and 42% in the US. The 2030 similarly saw 25% in Asia, 25% in Europe and 50% in the US.
By investor type, the 2015 saw 55% placed with funds, 36% with banks and 9% with retail. The 2030 saw 49% placed with funds, 27% with banks and 24% with retail.
"This was a very high quality order book of real money accounts particularly in the US," says one participant. "This is not something we've seen for a few months."
One credit positive was the announcement yesterday that a VAT bill has been approved by the country's Joint Congressional Panel. In true Philippines style, the outcome represented a messy compromise and analysts say it remains to be seen whether it will be enough to stop Standard & Poor's putting the country's BB rating on negative outlook later this year.
Legislators estimate the new measures will enable the government to generate an additional 0.7% of GDP in revenue this year and 2.4% next year, when the administration will be able to hike the VAT rate from 10% to 12%.
