Despite being forced to declare a state of emergency and foil a coup attempt, the Philippine government has managed to execute a remarkably ordered and successful funding campaign over the past 12 months.
Omar Cruz, national treasurer for the Philippines, responsible for all international and local funding, says: “Even with the political rumblings, we were able to remain focused and committed to our funding programme. We simply stuck to sound fundamental practices, and the market responded favourably.”
For Cruz, who took up the position in February last year, it was certainly a baptism by fire. Market conditions could, at the very least, be described as challenging. Over the course of 2005, president Gloria Macapagal Arroyo faced impeachment over allegations of corruption among family members and vote-rigging. The country suffered downgrades at the hands of all three rating agencies, and the government dragged its feet over crucial fiscal reforms.
No fear
You would think that this would be enough to spook foreign investors, but a policy of transparency and discipline, implemented by Cruz, kept the investment community on side and keen to buy the sovereign credit. Given the obstacles, Cruz’s success is all the more impressive.
In 2005, the sovereign raised a total of $3.2 billion of international debt in a number of timely and well executed deals. Cruz remained nimble on his feet, implementing a disciplined funding strategy while allowing enough flexibility to take advantage of windows of opportunity in the market.
“I approach every window of opportunity as if it might be my last,” says Cruz. “We make sure all preparation and approvals are in place ahead of time so that, when an opportunity presents itself, we are able to act swiftly and decisively.”
In what some might regard as an unusual move, the year’s international issuance started in February, shortly after rating agency Standard & Poor’s downgraded the Philippines to BB- from BB.
What it revealed is the Philippines treasury’s ability to read the market correctly. The feeling was that the downgrade removed an element of uncertainty from the deal and that it had already been priced in by the market. The benchmark $1.5 billion, 25-year deal, at that time the Philippines’ largest ever, was a total success.
The deal attracted an order book of more than $7.5 billion from 400 accounts. The bond had universal appeal, achieving the broadest ever distribution for a Philippines deal. Investors in Hong Kong were allocated 4%, the Philippines 10%, Singapore 16%, Europe and the US 35% each. Of that, asset managers took 74%, banks 13%, insurance companies 4% and retail 9%.
Building on this momentum, the Philippines returned to the markets with a similarly successful issue in early May, when it raised $750 million by reopening its 2015 and 2030 bonds.
Despite even more hazardous market conditions, as Standard & Poor’s downgraded Ford and General Motors to junk bond status, the deal again attracted a strong order book of $3.8 billion.
“A major factor was that we were able to convey to the market our commitment to a clear and disciplined medium-to-long-term fiscal programme. Investors were comfortable with the credit,” says Cruz.
This allowed arrangers Deutsche Bank, HSBC and JP Morgan to price $250 million of new 2015s and $500 million of 2030s, both at the tighter end of price talk – although they did pay a new issue premium. Cruz turned the transaction around in 24 hours.
In July the country had to postpone a euro issue, largely owing to suspension of the new VAT law. When this was lifted in September, the Philippines rounded off the year in style, completing its third and final offshore commercial fundraising of 2005 with a $1 billion, 2016 deal.
With fiscal reform back on track and the country enjoying a greater number of monthly budget surpluses in 2005 than it had for many years, investor appetite for the deal was strong, attracting orders worth $7.2 billion.
This confidence was also reflected in the pricing of the deal at 98.301 with a coupon of 8%, the lowest ever for the Philippines, to yield 8.25%.
Resolute
Despite encouragement from some corners to take advantage of strong investor sentiment and pre-fund some of 2006’s financing needs, Cruz stood firm. “This is all about communication and clarity,” says Cruz. “We set our funding targets and stuck to this plan faithfully. This way investors can feel confident in us.”
That decision has been vindicated by the success of 2006’s funding programme. With investor confidence high in the transparency and professionalism of the Philippines, Cruz was quick to hit the markets at the beginning of the year.
In January, Cruz oversaw a two-tranche set of financing, a $1.5 billion, 25-year bond followed the same day by a E500 million, 10-year issue. Together these deals represented close to two-thirds of the sovereign’s international public debt target for 2006.
“We saw a tremendous opportunity in the market and took advantage of this liquidity to issue a huge deal. It was also a chance to rebalance our portfolio. The dollar/euro deal fitted with our liability management strategy,” says Cruz.
With international borrowing on track, Cruz is turning his attention to the local bond markets. In an innovative deal, the Philippines executed a $2.2 billion bond swap at the end of January. Given that President Arroyo had been forced to declare a state of emergency at the time, following a coup attempt, it was a brave and ultimately vindicated decision to go ahead with the deal.
The deal exchanged 90 domestic government bonds into three new and more liquid benchmark bonds: a Ps30 billion of three-year benchmark bonds, Ps25 billion of five years and Ps20 billion of seven years.
“I am very proud of what we have achieved, and we will continue to drive developments in this market,” says Cruz.