If the Philippines story is improving – and more and more people believe that it is – then that improvement is finding its most striking reflection in the bond markets. The two-tranche, multi-currency bond deals in January of this year showed the world that buyers of sovereign debt, at least, believe Manila is on the mend.
The groundwork had already been done for these deals the previous September with a successful deal that marked the arrival of a new style under national treasurer Omar Cruz. “That was the establishment of the Omar Cruz era,” recalls John Lefevre, syndicate official at Citigroup. “He said he was going to approach the market clearly and openly, outline his targets and his objectives, and stick to it. He proved that to be the case in September, and people clearly saw that the Philippines had a new way in which it was going to conduct its funding strategy.” That trust was to prove key to later deals.
The new year came, and with it the Philippines was confronted by its typically daunting full-year funding requirements, this time about $3.1 billion. In a country in which debt interest repayment accounts for more than 30% of national revenues, management of the debt markets is of immense importance, and Cruz decided to get in early while there was plenty of liquidity around. “It was a deliberate plan to come to the market first, ahead of everyone, when there was so much liquidity there,” he recalls. And it worked, with the dollar transaction achieving the tightest spread ever for the Republic.
Its success is very easily quantified. Almost exactly a year earlier, the Philippines raised $1.5 billion of 20-year paper – so the same in volume, but with a shorter duration. That deal paid a 9.7% yield with a spread of 503 basis points over comparable Treasuries. The new dollar deal paid 7.875% at 333.5 basis points over – a dramatic tightening despite the fact that it was a longer-tenor deal.
The deal in its entirety raised a $15 billion order book, with 400 investors joining the dollar deal and 230 the euro. Its scale, given the total funding requirement for the year, created some momentum and scarcity value in its own right. “Investors realized they would likely get severely scaled-back allocations in light of such an oversubscribed order book,” says Lefevre. “As a result, we saw investors looking to buy existing Philly bonds, causing the outstanding paper to tighten as much as 10 basis points.” That’s the opposite of the norm. “You would expect normally that when you announce the deal, existing bonds sell off a bit, and the new issue prices at a premium,” Lefevre says. “In this case the existing bonds rallied, and the new ones priced inside their curve.”
Cruz had planned to tap euros much earlier, but when GM and Ford ran into trouble, the premium for borrowing in euros over dollars rose over 75 basis points. By January it had come down to 37. “Again we hit at the right time,” Cruz says.
Cruz, and the Philippines generally, no longer roadshow ahead of individual deals but instead hit the road on a non-deal basis. When a deal is ready to go Cruz conducts investor calls for Asia, Europe and the US, but investors are already in tune with what’s happening. That no doubt helped to get the deal away first and with such speed.
Backing the reception have been the improvements in the fiscal position of the Philippines, with progress already clear in revenue collection and an ambitious but feasible plan to wipe out the deficit by 2008. Investor conviction towards this story was demonstrated later in the year when the Philippines went back to the markets, completing its funding requirements for the year, and including an additional $450 million tap of the 25-year dollar bonds. “We’re done,” says Cruz.
But he’s got plenty more to do, and today he is mainly preoccupied with shifting the funding mix away from offshore currencies and towards the peso. He is in the midst of a second domestic exchange programme, mopping up dozens of illiquid peso issues and turning them into a handful of more liquid securities, and by the end of it will have usable benchmarks in the three-, five-, seven- and 10-year tenors. He wants domestic/foreign borrowing to move to a 70/30 ratio, greatly reducing the country’s exposure to foreign exchange movements.
“Within the span of a year, the Philippines has established itself as one of the most reputable borrowers in the region,” says Lefevre. “You can point to transparency and the fact that they stick to their word.”
Issuer: Republic of the Philippines
Date of launch: January 2006
Amount: $1.5 billion (25-year bonds); E500 million (10-year bonds)
Maturity: 2031 and 2016
Joint lead managers: Citigroup, Credit Suisse, Deutsche Bank, UBS