Taking advantage of pricing differentials between its onshore and offshore credit curve, the Republic of the Philippines has been able to secure substantial cost savings over issuance in the straight dollar market.
The $116.81 million three year portion of the note was, for example, completed at 170bp over Libor, versus an outstanding trading spread of 325bp over Libor for the Bangko Sentral ng Pilipinas's (BSP) 2004 bond. The $103.59 million five-year portion was completed at 190bp over, compared to a 450bp trading level for the Republic's 2006 bond. Respectively, these equate to a cost saving of 155bp on the three year and 295bp saving on the five year.
HSBC completed a plain vanilla peso/dollar swap at these levels after auctioning Ps11.81 billion of three-year and five-year fixed rate notes domestically. Conducted as a Dutch auction on Tuesday, investors bid the three-year note at 14% and the five-year note at 14.25%. This bought pricing of respectively 26.4bp and 62.8bp through existing domestic sovereign bonds, which were bid at 14.26% and 14.87% at the time.
The ability to price below the sovereign curve is largely a matter of tax. When the Republic normally issues bonds in the domestic market, investors are paid net of tax, meaning that they receive the coupon minus tax. The new note issue, again a first for the sovereign, is paid gross of tax and under domestic law, investors that have a negative tax position, do not have to pay it. Many local banks that have carried forward negative tax positions because of higher provisioning requirements in recent years would, therefore, have lapped the paper up.
However, the government caps the number of investors that can participate in any individual note transaction to 19. As a result, lead officials say that this was a second reason why the deal was heavily bid. "Investors knew that only 19 accounts would get allocated and the deal size was quite small, so they had to bid relatively aggressively to get paper," says one.
The transaction, issued in the name of the Bureau of Treasury, consequently closed 2.48 times oversubscribed.
The successful completion and innovative nature of such an issue offers government funding officials a welcome respite from their travails in the international bond markets. After mandating Credit Suisse First Boston for a $500 million bond at 510bp over Treasuries in early July and subsequently upsizing their SEC shelf to $1.2 billion, officials are all too aware the whole market is closely watching for their next move and a potential return to grace with international investors.
