After requesting that banks submit ideas for a new dollar bond, the Department of Treasury mandated three houses yesterday (Wednesday) for a $500 million 10-year deal. HSBC, Salomon Smith Barney and UBS Warburg won the books for an offering, which may launch as soon as today.
Both HSBC and UBS Warburg have a longstanding working relationship with the Republic, but for Salomon the deal marks a return to the fold. The US investment bank has been most closely associated with the central bank in the past and has recently been trying to structure a credit enhanced transaction for Napocor, which many now believe will not see the light of day and may explain Salomon's sovereign reward.
Specialists believe a straight 10-year deal makes sense, as this is where there is a noticeable gap in the Republic's relatively full yield curve. All there is at this maturity is a put bond launched in mid-January via Credit Suisse First Boston and Morgan Stanley.
Raising $750 million, the 2017 transaction puttable in 2012 was priced at 99.331% with a coupon of 9.375% to yield 9.48% or 437.5bp over Treasuries. In Asian trading yesterday, the deal was bid at 104.13% to yield 8.71% or 488bp over Treasuries.
In the intervening 10 months there have been a series of US rate cuts, which means the Philippines' overall funding cost will be cheaper. However, concerns about a lack of control over its budget deficit and downward ratings momentum have taken their toll on spreads.
In the meantime, Metrobank successfully completed the Republic's first public subordinated debt transaction yesterday under the lead of UBS Warburg. Investors have traditionally done well from Asian sub debt deals and this one was underpinned by the same private banking demand that has helped its recent predecessors from Indonesia, as well as strong onshore demand.
A $125 million lower tier 2 transaction with a 10 non-call five structure was priced at 99.50% with a semi-annual coupon of 8.5% to yield 8.625% or 578bp over Treasuries. If the Ba1-rated deal is not called, the spread will step up to 867bp. Fees total 1.125%.
On a like-for-like basis, pricing came at a premium of roughly 105bp to the sovereign curve. The benchmark used by the lead was the Republic's five-month longer April 2008 transaction, which was bid at 7.59% yesterday, or 481bp over Treasuries. The only other benchmark is a nearly two-year shorter transaction for conglomerate JG Summit, which has a February 2006 maturity yielding 8.16% or 539bp over Treasuries.
Observers say books closed just over one-and-a-half times oversubscribed with participation from 49 accounts. Geographically the book split Asia 44%, Philippines 36% and Europe 20%. By investor type, private banks took 38%, banks 27%, asset managers 24%, insurance funds 10% and corporates 1%.
As one specialist puts it, "Having a strong private banking component in the primary book helps a lot. This part of the investor base is quite loyal and provides good secondary market support, continuing to buy even during market dips."
Unlike most deals from the Philippines, observers say the offshore element of the book was the first to build as a number of local banks and funds took a while to get their lines in place, as the structure is not one they are familiar with.
Under domestic rules, Philippine banks have to assign a 100% risk weighting for subordinated debt and no one bank is allowed to purchase more than 10% of an individual deal. In this instance, the heaviest buying is said to have come from domestic banks' trust departments.
The central bank has also recently relaxed its overall criteria for tier 2 capital in a bid to encourage banks to use subordinated debt as a cushion for their balance sheets ahead of more aggressive NPL transfers. Guidelines formally announced this Monday increased the amount of tier 2 capital from 50% to 100% of tier 1 capital and lower tier 2 capital from 25% to 50% of overall tier 2.
The central bank also said that where upper tier 2 debt is concerned, the minimum maturity of the call option has been lengthened from five to 10-years. The overall capital ratio remains fixed at 10%.
Prior to this deal, Metrobank has a total CAR of 12.2% and bankers believe that it will now creep back above 13% again.
