Filipino issuers are experiencing robust demand for their bonds in the months ahead of an anticipated credit rating upgrade that will bring the country up to investment grade status. This has created a favourable pricing environment which bankers believe will encourage state and corporate issuers to sell more and longer-dated debt to help develop the local currency market.
“Market participants have been pricing in the possibility of an upgrade since the end of last year, and investors this year have been extremely bullish on Filipino credits,” said one peso bond trader at a Philippine bank. “Many players are seeing that investor risk appetite has improved and move investors are getting into the long-end of the curve to take a long-term view on the market.”
The anticipation that the Philippines will finally receive an investment grade rating by one of the big-three credit ratings agencies – Fitch, Moody’s and Standard & Poor’s (S&P) – in 2013 is already impacting secondary market prices. Longer-dated Philippines Treasuries – with tenors of 10-25 years – have come in an average of 69 basis points (bp) in the secondary market from January 1 to February 15. Meanwhile, yields across the sovereign curve, ranging from one-month to 25-year debt, have risen by 32bp in 2013.
The Philippines has been on an upgrade trend at each of the big-three credit ratings agencies in recent years, and it is widely believed that the country will reach investment grade status in 2013. Already, Fitch, which last upgraded the country to ‘BB+’ in June 2011 – a notch below investment grade – is said to have sent an assessment team to Manila to determine a potential ratings upgrade.
“There is a lot of optimism that comes with that expected upgrade to investment grade...which I hope will happen in the second half of the year or the second quarter,” said one treasury official at a Filipino bank. “With an upgrade hopefully coming within the year, there are definitely bond issuers who would like to capitalise on this.”
Prices at the longer-end of the curve will be most susceptible to falling yields given their scarcity in the market combined with investors’ increasing appetite for longer-term exposure to the market as the Philippines’ financial and governance fundamentals improve.
Yet corporates already participating in the local currency bond market may also be considering longer tenors to take advantage of the trend. One Philippines analysts says that the country’s largest conglomerates, holding companies and real estate names planning to bid for the country’s public--private partnership projects, including Ayala Corporation, Metro Pacific Investments Corporation and JG Summit Holdings, would be the prime candidates to issue longer-dated debt to finance their projects. They are also recognisable names to investors.
“Ayala Corp. has issued a 15-year bond, but seven- to 10-year bonds have been more typical for corporates participating in the local market,” said the analyst. “But I think the curve is moving out, to maybe 10-15 year bonds given these market conditions. The market is quite liquid and rates are low, so good candidates for longer-dated issues are companies that are going to participate in the public-private partnership because these are quite well-known and transparent to investors.”
However, most existing corporate issuers in the domestic market will continue selling shorter-dated debt, while new issuers will be few and far between - for now.
“It’s still a bit tough for new issuers because the bond market is not that developed yet. If you look back 10 years ago, there were only 10 companies that could tap the market. Now, outside the top 30 names or so, it’s very hard to raise money because a lot of companies don’t have a lot of exposure to investors,” said the analyst. “But the companies that have a presence in the market will continue to be active at the shorter- and medium-end. Rates are going to be good for them...and this will encourage even more activity.”
Favourable pricing is likely to spur this additional activity.
Well-known corporates typically price approximately 100bp higher than Treasuries in the peso market. As Treasuries achieve lower yields, corporates will become more incentivised to issue.
“We hope that the positive pricing in the Treasuries market will improve the corporate bond market, but so far it has been laggard,” said the rates strategist. “We’re hoping this will jumpstart trading in the secondary market and make issuance more appealing for corporates...The noise around an upgrade is getting stronger, and we’ve been hearing that an upgrade will be coming earlier rather than later. This will encourage more corporate participation in the local market.”
But in terms of timing, Filipino issuers shouldn’t wait for an actual upgrade – the favourable pricing environment seen now won’t vary after the country becomes investment grade, predicts the treasury official.
“An upgrade will give a little push to the market, but it will not have a big impact when that investment grade title comes – I’m sure we’ll see the secondary market go a few percentage points up but it won’t be that much of an impact,” he concluded. “What issuers expect is that when the upgrade comes, they’ll be realising gains and then seeing more activity in the secondary market. But the market is already doing that. Issuers should consider their bonds now; there’s no need to wait.”