Copying and distributing are prohibited without permission of the publisher.


No time to waste: Philippines should hit bond market now

09 Jul 2012

The Republic of the Philippines is on a roll. The country on its way up the rating curve, it has already had big success in the dollar market this year, and it is trading at an eye-popping discount to some European countries. The sovereign should waste no time taking advantage of this rosy situation. It will not last forever.

The Philippines’ government has already raised $1.5bn in the international dollar so far this year, after selling a 25 year deal in January. That leaves the government with just $750m left to raise before the end of the year, according to government officials. But the sovereign should not stop there. Now is a good time to pre-fund.

It may look like a pretty dire environment in which to sell any more bonds than you have to. European gloom is as infectious as ever, investors are hoarding cash and the secondary debt market is as frenetic as a pinball. But the weak market environment can help the best-regarded borrowers, and when it comes to Asian credit markets, the Philippines is certainly one of the most popular.

Standard & Poor’s raised the credit rating of the Republic of the Philippines by one notch to BB+ this week, moving it only one upgrade away from investment grade. That followed a similar move by Fitch late last year, and a decision by Moody’s to give the country’s Ba2 rating a positive outlook in May.
These moves were largely anticipated by investors, and many bank analysts are predicting the sovereign will move to an investment grade rating within the next two years. But this is not something anyone should take for granted.

Europe and the US are clearly struggling, but the world’s economic problems are in no way confined to the West. India is already suffering and while China is aggressively moving to keep its growth engine in tact, if it fails to do so the Philippines will find itself in a world dominated by major powers with major problems. That is not a great environment for growth.

This is why the Philippines should take advantage of its good image now. The government may have $750m left to fund, but it could pull off a lot more.

The country is planning to launch a debt buyback or exchange later this year, and will then sell either a global peso deal or another international dollar bond. It should consider turning its dollar bond buyback into an exchange-and-increase offer — allowing it to boost its funding, while shifting existing liabilities to a longer maturity — and then follow that up with a new international deal, structured in whichever way will maximise demand at the time.

This might seem counter-intuitive to a country that wants to maximise its chances of getting an investment grade rating. Why take on more debt? Simple: it can see this year’s funding as an alternative to more issuance next year, selling bonds when investors have a lot of faith in the future of the country — and even more scepticism about elsewhere.

One of the most remarkable things for traders to watch over the present crisis has been the widening of European sovereign bonds to levels well above those of lower rated emerging market countries. The Philippines is benefitting from that right now. Its most liquid 10 year deal was yielding around 2.80% on Tuesday, compared to the 6.03% yield offered by the Republic of Italy, which is rated A3/A+/BBB+ by Moody’s, Fitch and Standard & Poor’s. But this will not last forever.

There now appear to be two risks for the Philippines’ dollar bond curve. The most welcome outcome would be Europe pulling through, investor confidence in the continent increasing, and a widespread exit of emerging market sovereign deals by investors hungry to exploit the huge value offered by European credits. The alternative is that investors continue to avoid Europe, the pan-Asian economy continues to suffer, and the Philippines widens along with the rest of the continent. Either option means that now is a good time to raise cash.

The Philippines has been a darling for DCM bankers in Asia for years: a savvy borrower, with a great sense of timing, and widespread access to the market. It should underscore that reputation in the second half, selling at least one landmark deal and setting itself up nicely for 2013.

09 Jul 2012