The Republic of the Philippines created a more liquid euro-denominated benchmark yesterday (Tuesday), adding a further Eu350 million to its Eu300 million 9.125% February 2010 bond. Under the lead management of Credit Suisse First Boston and Deutsche Bank, the Ba2/BB rated credit also managed to secure its most aggressive pricing so far this year, completing the deal at a 1% discount to secondary levels.
The tap was priced at 103.25% to yield 8.35%. At the time it was announced Monday European time, the outstanding bond was bid at 104.25%.
Pricing at these levels equated to 483bp over Bunds, 454bp over euribor and 453bp over Libor. Fees were 17.5bp and in winning the deal, the two leads had agreed to backstop pricing at the final issue price of 103.25%.
Confidence in their mandate winning bid was underpinned by feedback from a European credit roadshow the two recently conducted for the sovereign. So far this year, the sovereign has completed three other taps, all of which have priced wider than the new deal.
In April, the Republic re-opened its 2011 deal for $200 million at a 1.28% discount to secondary levels and its 2014 bond for $200 million at a 1.046% discount. More recently in July, it re-opened its 2017 bond puttable in 2012 at a 1.25% discount.
Tighter pricing on the new deal reinforces analysts' views that credit sentiment towards the Philippines is normalising following the re-election of President Gloria Arroyo. However, the country still has some way to go before it gets back to the pre-Poe pricing levels of last October. Then it re-opened its 2014 bond for $250 million at a 0.375% discount to secondary levels and its 2025 bond for $250 million at a 0.625% discount.
Bankers report a fairly healthy order book for the new deal, which attracted over Eu700 million in demand. About 80 investors participated, of which about 30 do not invest in the US dollar market and about eight were completely new to the credit.
By geography, the deal saw a split of 40% Asia, 40% Europe and 10% US. By investor type, banks took 45%, asset managers 35%, retail 10% and others 10%.
Initially the leads went out with guidance for an issue size of Eu200 million, using the momentum to leverage the deal size higher. Proceeds will be used to re-finance an Eu350 million deal, which matures in September.
This latter deal was never swapped back to dollars or pesos. Given that the European currency has appreciated about 16% since the deal was launched in 1999, a re-financing exercise in dollars would prove more costly.
However, it still costs the Philippines more to fund in euros than dollars, with the February 2010 bond yielding 48bp more on the offer side than a US dollar-denominated March 2010 deal.
Bankers say investors were attracted to the liquidity of the new offering and the positive spread momentum, which may be generated by Arroyo's State of the Union address earlier this week. In it she outlined proposals for eight new tax laws to raise additional revenue of Ps80 billion to help bridge the budget deficit.
She also revealed plans for a more controversial bill to scrap the pork barrel politics of the Philippines US modeled political system. She hopes to replace the existing system with a European parliamentary system, reportedly modeled on France.
Globally emerging market spreads have performed strongly over the past few weeks and the Philippines has likewise been one of the best performers in the Asian credit universe. Over the past month, sovereign spreads have contracted by an average of about 25bp to 30bp and yields by an average of roughly 40bp.
