The Republic of the Philippines raised $250 million from a Reg S eurobond yesterday via HSBC, First Metro and Land Bank of the Philippines.
The original intention of the three-year deal was to widen the Bureau of Treasury's retail bond programme. Since it first inaugurated the programme in 2001, the Treasury has progressively built up true "retail" participation in special issue government bonds from 10% to 30% of the overall issue size.
The new deal was supposed to mark the first one in which domestic retail investors could participate in the government's dollar issuance. However, the Bureau does not appear to have thought through the tax implications very thoroughly and the deal stumbled against 20% witholding tax provisions on domestic deals syndicated to more than 19 investors.
The Republic's offshore issuance is frequently placed with domestic accounts, which are then supposed to declare their investments for witholding tax purposes. But it is seen as a legal grey area.
Observers say the government has not given up on the idea of structuring a dollar deal, which can be easily syndicated to domestic retail investors and one solution is to withold the tax at source by grossing up the coupon.
In this instance, however, the government reverted to the eurobond market and given the short maturity, the deal appealed heavily to domestic accounts anyway.
Pricing came at 99.542% on a coupon of 5.625% to yield 5.8% or 377bp over two-year Treasuries. At this level, the new deal priced about 2bp wide of the Republic's outstanding October 2024 bond puttable in 2006.
The leads undertook a very short bookbuild, opening the deal in Asia's afternoon and closing a couple of hours later after it was fully subscribed. About 39 accounts participated, with a geographical split that saw about 65% placed into the Philippines, about 8% to Europe and the rest to Asia.
The Philippines has badly underperformed the rest of Asia because of a growing domestic political risk premium and some accounts are said to have viewed current levels as a good buying opportunity. Most of the government curve, for example, has widened about 60bp over the past month.
Many credit analysts still advice caution however and believe that the premium could expand further, particularly if Estrada ally and fellow actor Fernando Poe declares his candidacy for the Presidential election next May. A number also believe the curve will suffer from supply pressure if the government tries to pre-fund its 2004 offshore borrowing requirement before politics take centre stage. The BSP recently said that the government and Napocor together face $6 billion in redemptions during 2004.
In the meantime, two corporates both hope to become the first to launch a domestic bond issue with a special retail tranche. Ayala Land had mandated HSBC and the Land Bank of the Philippines for a Ps2 billion issue, while Globe Telecom has mandated First Metro, Citigroup and Deutsche for a similarly sized deal.
