Bowing to market concerns about the ability of the National Power Corporation (Napocor) to borrow funds in its own name, the Republic has taken the initiative for the third time this year. While submissions for a $600 million deal to be issued by Napocor itself still fall due today, it now seems highly likely that the Republic will borrow and on-lend the proceeds instead.
Banks were asked to submit proposals on a both a best efforts and hard underwritten basis for either a three to five-year issue, or a re-opening of the Republic's 2008, 2009, or 2010 bonds. Officials said that use of proceeds could cover a number of items of which Napocor is one and the prospective deal size mirrors the additional funding specialists believe the power needs following the government's decision to cut a Ps1.125 tariff surcharge by 85 centavos.
Since the Republic still has $300 million on its US shelf, it will be easy for it to return to the market pretty much immediately and given that a large portion of the bonds are likely to be placed in Asia, which do not fall under the shelf, there is ample room for it to raise a full $500 million.
However, a new bond issue will not be issued into the best market environment for sovereign debt since spreads have been under pressure for the last three weeks. Spectacular spread tightening since the beginning of the year has been reversed on the back of a growing perception that spreads may have overshot themselves and fiscal concerns regarding the budget deficit. Two days ago, these were also joined by new political uncertainties following the defection of Senator Osmena to the opposition, which has left the Arroyo without majority control in the Senate.
Where the Ps130 billion ($2.58 billion) 2002 deficit is concerned, the government maintains that it is still on course to meet its target despite the fact that it has fallen short of its revenue targets every single month so far this year. By the end of the first quarter, for example, the government had incurred a deficit of Ps61.2 billion ($1.21 billion), 15.6% more than the Ps52.9 billion it had projected.
Finance Secretary Jose Camacho has responded by saying that the government is confident of meeting the full year target, "Because we can control our expenditure. Interest savings are substantial because of low interest rates," he commented. "If there is any shortfall at the end of the year from the Bureau of Internal Revenue, then that could easily be recovered by the interest savings."
In a research report published yesterday, HSBC analyst Dilip Shahani concluded that spreads remain vulnerable to unfavourable news. "We remain bulls over the medium term," he said, "But to expect a continual, straight-line flow of positive news is unreasonable. Inevitably there will be occasional, near-term bouts of negative surprises, which the foreign investor community will use to re-appraise President Arroyo's administration. To that extent, we suspect Philippine financial assets could well face a near-term period of weakness."
At the close of Asian trading yesterday, the Republic's April 2008 bond was bid at 106.2% to yield 7.53% or 314bp over Treasuries. By contrast, the March 2009 was bid at 103% to yield 7.79% or 272bp over Treasuries and the March 2010 at 111.63% to yield 7.85% or 277bp over Treasuries.
According to figures supplied by Barclays Capital, the 2010 has been the worst performing of any Asian benchmark in spread terms over the past month, shedding 55bp. Indeed of the top seven worst performing bonds, the Philippines corporate and sovereign universe account for six, with the 2008 also down 34bp.
