Universal Robina Corporation (URC), the Philippines largest snack food manufacturer, priced Asia's first bond deal of 2005 yesterday (January 12). Under the lead of Credit Suisse First Boston and JPMorgan a $100 million issue was upsized to $125 million after order books closed at just over $350 million.
The BB/Ba3 rated issue has a seven-year maturity with a five year put option and was priced at 99.199% on a coupon of 8.25%. This equates to 473bp over five-year Treasuries and about 435bp over Libor.
At these levels the deal came through initial guidance of 8.5% to 8.625% and also achieved a slimmer premium to the sovereign than it has done in the past. The ROP's 9.875% March 2010 issue was said to be yielding about 7.55% at the time of pricing.
The new deal has, therefore, priced at roughly 90bp over the sovereign in yield terms. When it last came to market in January 2003, URC priced a similarly sized $125 million five-year deal at a 100bp premium to the sovereign.
Bankers report that this deal is currently trading on a yield of about 7.75% down from just over 8% before roadshows started last week. When it was launched, the deal was priced with a 9% coupon and spread of 618bp over Treasuries.
Bankers also note that the yield curve is steep between three and five years. The ROP's 8.875% April 2008 bond, for example, is currently yield about 6% - a 150bp differential to the 2010 bond.
URC's parent JG Summit also has an 8.25% June 2008 bond outstanding, currently trading around the 9% area. However, the holding company parent is considered financially weaker than its operating subsidiary and is also unrated. URC by contrast is considered one of the most defensive credits in the Philippines and while gross debt to EBITDA runs at over four times, net debt is just 0.25 times thanks to a strong cash position.
The new deal appears to have been well timed. In addition to benefitting from the abundance of liquidity typically available at the beginning of each new year, it has also caught an unexpectedly positive tone towards the Philippines. Yet in a break with the precedent of recent years, the Philippines sovereign itself has yet not accessed the market and appears to be waiting for Moody's to deliver its rating decision.
Where previously most market participants were expecting the country to be downgraded to Ba3, a large number now believe it will remain at the Ba2 level. This change of heart follows a credit opinion published in early January where Moody's stated that the rating was less governed by the country's public sector debt burden than its external liquidity position.
The country's fiscal position also looks like it might be able to achieve a slightly healthier outlook following news this week that Congress may pass legislation allowing VAT to be raised from 10% to 12%. As a result, Philippine sovereign spreads have been among the best performing so far this week, with the ROP's benchmark March 2015 bond tightening from 447bp over Treasuries at the beginning of the week to 444bp by Asia's close yesterday.
