The Republic of the Philippines mandated Deutsche Bank, HSBC and JPMorgan for a $500 million or so benchmark tap of its 2015 bond on Wednesday. The two most striking aspects of the prospective transaction are its timing, which is unfortunate and the fees, which are pitiful and show that the reality of a "free" deal is inching ever closer for Asia's most prolific borrower.
At 3bp, the Republic is set to pay the lowest fee on record for an Asian public sector bond deal and half of what it paid for the last tap of its 2015 bonds last September. For two of the three lead managers, however, the deal will at least pay 3bp more than they pitched for it.
None of the three lead managers was prepared to admit they had been mandated and this is hardly surprising given the likelihood the deal will get cancelled followed the disappointing trading pattern of the Republic of Indonesia's $1 billion bond deal.
Like the Philippines, the Indonesian government paid minimal fees on its deal - 10bp - and bankers believe it suffered because of it. Non syndicate banker report little to no support from the three lead managers - Citigroup, Deutsche Bank and UBS - once the deal broke syndicate in New York on Wednesday afternoon.
"I can't say I blame them really," says one debt capital markets specialist. "They weren't incentivized to support the trade and they could see that the market was against them with real money as well as the usual hedge fund account flipping the deal."
The initial trading pattern of the Indonesian deal has surprised many market participants given the size of the initial order book ($2.2 billion) and the sizeable new issue premium the sovereign paid over its outstanding 2014 deal (28bp). The main problem appears to have been the US, where the deal attracted very little support and subsequently got off on the wrong foot when it opened to trade during US rather than Asian trading hours.
By the end of the US trading day, it had already been marked down one point and was marked down a further point during Asian trading hours on Thursday.
"Everyone was looking to see how Asia would react when it opened," says one banker. "Unfortunately investors saw they'd been given full allocations overnight and starting panicking when they saw how it had traded in the US. Rather than wait and see the deal sink further, they decided to take an immediate hit and sell out. Strangely there was also no backstop bid from Indonesia itself to prop the market up."
The deal was initially priced at 99.127% on a coupon of 7.25% to yield 7.375%, equating to 302bp over Treasuries or 256bp over Libor. At the end of trading in Asia on Thursday it was bid at 97.875% to yield 320bp over Treasuries.
Many borrowers in the pipeline that had been waiting to see how Indonesia fared, are now likely to be having second thoughts about accessing the market in the immediate future. Top of these will be the Philippines.
As news of a possible tap began to gather momentum on Wednesday, outstanding bonds in the belly of the Philippines curve began to tighten as traders and investors started to put their shorts in place. The Republic's 2013, 2014, 2015, 2019 and 2017p2012 bonds were the best performing non-investment grade credits of the day.
The 2014 and 2015, for example, both closed a point tighter, with the 2015 bid at 102.1% to yield 8.55% or 417bp over Treasuries. During Thursday, as hopes for the tap faded and the whole market traded wider, so did the 2015, which closed Asian trading around the 426bp area.
At current levels, the Philippines is trading tight relative to Indonesia. When the latter first accessed the international bond markets in March 2004, there was a 200bp differential between itself and the Philippines.
By the time it came to roadshow a new bond this March, the differential had tightened to 160bp. Yesterday, there was roughly a 100bp differential between the new 2015 bond and the ROP's March 2015 bond on a Libor basis.
So far this year, the Philippines has only accessed the market once. In late January, it raised $1.5 billion from a 25-year bond issue via Citigroup, Deutsche Bank and UBS. The deal was phenomenally well received and marked a return to favour for a borrower, which had received a lot of criticism for its fundraising policy the previous year.
During 2004, the sovereign unsettled investors with a constant parade of taps: its 2010 euro-denominated deal as well as its 2011, 2014, 2015, 2017 and 2025 dollar deals. After the January 2005 deal, the Philippines funding team said the sovereign would only return to the market during the second half of the year and would favour benchmark deals over taps and small scale transactions.
Since then, however, a new funding team has been put in place under National Treasurer Omar Cruz. Many global borrowers have also been re-assessing their 2005 funding programmes in the light of recent market conditions. Bankers say the majority, including the Philippines, are trying to front load as much as possible in anticipation of rising Treasury yields and volatile markets.
Some banks consequently believe that prospective borrowers should not be deterred by Indonesia's experience and should take advantage of market windows while they can. In a research report published yesterday, Barclays said that market technicals continue to remain favourable.
It argued that while spreads will not tighten back to pre-correction lows, there are a number of factors, which argue for continued outperformance of Asian bonds and their de-coupling from US and European credits. "The Asian eurobond market has shown a high degree of resilience," it concluded.
It said this has also been supported by the recent trading level of 10-year US Treasuries, which could continue to trade below 4.40% over the next few weeks, supported by soft inflation data out of the US next week.
