Union Bank of the Philippines completed its debut international bond yesterday (September 16), bringing a $125 million transaction to market via Credit Suisse First Boston and UBS. The three-year Reg S issue was downsized from $150 million after a sluggish bookbuilding period, dominated by spread widening cross the whole Philippines curve.
Pricing came in at 99.669% on a coupon of 7.25% to yield 7.375%. This equates to 455bp over Treasuries, or 409bp over Libor. Fees are 45bp and HSBC was co-manager.
A final order book of 140 million was reported and bankers say it would have been possible to hit the original deal size had it been kept open into next week. However, it was decided to close on schedule to minimize potential market risk in the run up to a probable interest rate hike in the US next week.
A total of 41 accounts participated. By geography, Asia accounted for 89%, Europe 9% and offshore US 2%. The Philippines comprised about 60% of the total and Singapore a further 26%.
By investor type, private banks came in for 56%, banks 29%, asset managers 14% and insurance companies 1%.
The deal's distribution statistics are very similar to those of Banco de Oro (BDO), the only other Philippines bank to have issued a fixed rate bond since the Asian financial crisis. BDO has the same Ba2 rating as Union Bank and issued a $150 million issue via UBS in October 2003. About 90% of its deal was placed in Asia and 50% went to private banks.
BDO's 6.5% deal due October 2008, puttable in 2006 is currently bid at 100.5% to yield 6.29%. Bankers estimate the curve is worth about 40bp and with a new issue premium believe an on-the-run BDO three-year deal would price around 6.8% to 6.9% level.
This means Union Bank has come at 50bp to 60bp premium.
BDO's deal was also priced at a 151bp premium to the sovereign curve, whereas as Union Bank has priced at 179bp over. This is based on the Republic's September 2007 issue, which is currently yielding 5.47% or roughly 228bp over Libor.
Given the prevailing weak tone towards the Philippines, a higher premium to the sovereign was always more likely than not. BDO also enjoys something of an advantage over the rest of the Philippines banking sector because of its strong financial ratios and ownership by the Sy family, which has a formidable brand with local retail investors.
BDO, for example, has an NPL ratio of 6.73% as of June 2004 compared to Union Bank's 14.8%. The latter stands marginally above the 14.47% average of the domestic banking sector.
Union Bank's credit strengths come from its efficiency. The Aboitz-owned bank enjoys the highest Return on Assets (ROA) of any domestic bank and the second highest Return on Equity (ROE). As of June, these stood respectively at 2.8% and 14.1%.
Assets were up roughly 14% year-on-year to Ps76.7 billion ($1.37 billion) making Union Bank the Republic's 13th largest by assets.
Yet ultimately the deal proved a struggle in a week characterized by frothy order books and rapid secondary market tightening. Against this backdrop the Philippines has underperformed.
Spreads widened 10bp to 15bp at the beginning of the week after National Treasurer Mina Figueroa handed in her resignation and the market focused on President Arroyo's struggle to push plans to avert a fiscal crisis through Congress.
