While other sovereigns have played with the idea of offshore bond issuance in their currency, it is the Republic of the Philippines (RoP) that has consistently tapped international markets — so far three times since 2010 — and to great investor demand.
“We have taken advantage of the healthy market appetite for Philippine paper to issue debt in the form of Global Peso Notes,” says Philippine finance secretary Cesar Purisima. “This has been a successful way for us to reduce our exposure to foreign exchange risk further and to re-denominate our foreign exchange liabilities to local currency.”
The country’s debut GPN was in September 2010, and was the first of its kind of Asia, a synthetic peso bond where coupon and principal payments are linked to the performance of the peso against the dollar, but where payments are made in dollars.
“Latin American sovereigns had printed offshore currency bonds — the Philippine offshore peso note printed in the slipstream of issues from Colombia and Chile,” explains Avanti Save, vice president of credit strategy at Barclays in Singapore.
That deal certainly made its mark. The $1bn-equivalent SEC-registered 10 year was a coup for the republic. The 5% yield was comfortably inside not only where the Philippines had ever priced a US dollar global but also inside where onshore 10 year government paper was trading. More to the point, the more than 13 times oversubscription pointed to strong international demand, allowing the leads to allocate primarily to institutional investors.
For investors, one main attraction was exposure to the name. While many had long wanted to hold onshore paper, they had balked at the 20% withholding tax and the complexities of onshore custodian accounts and counterparty risks. “A global peso is considerably easier for investors,” says Barclays’ Save.
A more significant attraction, however, has been the currency play. “The market has increasingly demonstrated preference for the Global Peso Notes with expectations of peso appreciation,” says Purisima. In 2012, for example, the peso appreciated 6.6% against the US dollar and was the second best performing of the 11 most-traded currencies in Asia, according to Bloomberg.
“In many ways Philippine offshore peso notes have been a good access vehicle to take a view on the PHP currency and [central bank] RPGB rates. They are denominated in peso, but they deliver in US dollars,” says Andrew Stephen, head of private placements and local currency issuance, Asia at Deutsche Bank.
The enthusiasm for peso-denominated Philippine debt carried over to 2011, when, in January, RoP opened the Asian primary market at the very start of the year with a $1.25bn-equivalent 25 year GPN. The longer tenor and the tight pricing — the 2036s were priced at the tight end of the 6.25%-6.375% guidance after reaching a book of $3.6bn — showed continued confidence in the country. The pricing was 185bp inside where equivalent paper was trading in the domestic market. Indeed it was a sign of the mood that soon after the bond was issued international ratings agency Moody’s put the country’s Ba3 rating on positive outlook.
And in November last year, the Philippines sold its third GPN, a $750m-equivalent 3.9% 10 year via Credit Suisse, Deutsche Bank and HSBC. This was a step up for the sovereign in the evolution of its debt. The seven times oversubscription on the deal pointed to the continued attraction that the name had, but it was also a sign of a maturity and development of the market. It was the first time that the sovereign had offered GPNs as part of a liability management exercise to lower interest expenses and retire more expensive debt in dollars and euros.
“The exercise will reduce interest costs for the Republic, avoid bunching up of maturities, and extend the duration profile of the Republic’s outstanding debt portfolio,” said National Treasurer Rosalia De Leon in a statement at the time.
Corporate complexities
While the sovereign has been a regular borrower in the offshore peso market, it is perhaps a surprise that few corporates have followed suit. In the wake of the first global peso deal for RoP, both Petron Corporation and Export-Import Bank of Korea, better known as Kexim, dipped their feet in the water, but there has been nothing since then.
Petron Corp, the Philippines largest oil refiner, went first, only two months after the sovereign. It sold a Ps20bn ($475m) seven year Reg S bond at 7% via Credit Suisse, Deutsche Bank, HSBC and Standard Chartered. As it was for the sovereign, the appetite was certainly there. The book was 2-1/2 times oversubscribed.
A few weeks later, Kexim appeared, explicitly saying that a peso-denominated issue could offer investment grade risk with attractive currency exposure. It sold a $263m-equivalent 4% 144A/Reg S five year bond as a private placement from reverse enquiry. The pricing, via JP Morgan, was attractive too. It came in around 25bp inside where Kexim’s outstanding five year paper was trading.
The lack of corporate issuance since then has less to do with lack of interest or the structure of the bond and rather more to do with the regulatory issues and the complexities of a peso liability that is then settled in dollars.
While straightforward for the sovereign, it requires corporates to register with the central bank to service the dollar flow, something that adds to the cost of borrowing. Most corporates have, say bankers, simply tapped the domestic bond market for their needs.
Part of the continued attraction of GPNs to investors has been consistent and justifiable global confidence in the economy. In the second quarter of this year, the economy grew 7.5%, according to the government, and the country had a current account surplus of $1.2bn in March, according to the central bank. Remittances from Filipinos working overseas, a significant issue for the diasporic workforce, also remain high; they were up $572m on the same period in 2012.
At its most obvious level, sign of economic success can be seen in that the Philippines is now rated investment grade by two of the three main ratings agencies. At the beginning of May Standard & Poor’s upgraded the Philippines to BBB- from BB+. This followed an upgrade to BBB- in March from Fitch.
At the time Fitch noted: “Improvements in fiscal management begun under President Arroyo have made general government debt dynamics more resilient to shocks. Strong economic growth and moderate budget deficits have brought the general government debt/GDP ratio in line with the BBB median.”
Only Moody’s still has the sovereign at Ba1, one notch below investment grade. And even there an upgrade is a matter of “when” rather than “if”. The country was put on review for upgrade at the end of July.
Unlike the rout seen in other Asian sovereign bonds this year, the RoP offshore notes have performed solidly in secondary. On September 10, the 21s were quoted at 104.312/105.625 to yield 4.259/4.055%; the 22s were at 97.002/98.822 to yield 4.297/4.054% while the 36s were at 107.054/109.257 to yield 5.688/5.523%. “The paper is not heavily traded — the paper mostly went to buy-and-hold investors,” says Lynette Ortiz, Philippines head of global markets at Standard Chartered. Another banker points out that it was rare to see trades of more than $10m each day.
Next up?
With this kind of performance, unsurprisingly, a new GPN either for late 2013 or early 2014 has been on the agenda for some time. Pricing would be moderately straightforward and any new issue would simply price off the curve that has been established. Syndicate heads suggest that a new issue premium would be around 25bp-30bp. A 10 year could get away comfortably with a coupon of under 5%.
Purisima will not be drawn on timing, saying that GPN issuance “serves as a vehicle for us to access peso issuance if the sentiment in the local capital markets is not opportune” and that it depends on a number of factors.
This is all good news, but there are a couple of problems. Although a bid remains for offshore bonds, it is niche. Few doubt that were a new GPN to emerge, RoP would go for another 10 year. “It is the safe tenor,” says Wick Veloso, president and chief executive officer of HSBC Philippines.
But with another 10 year in play, the question must be asked to whom the RoP is appealing. “There is no talk at all of a five year issue, so RoP is not planning to target banks as investors. Because of this, it wouldn’t be targeting a new issuer base,” says one regional banker.
More significantly, since May 22 when Ben Bernanke, chairman of the US Federal Reserve, indicated that he intended to begin reducing quantitative easing, Asian currencies have sold off. The Philippine currency has weakened only 6.7% against the dollar this year, compared to an 18% plunge in the Indian rupee and a 10% drop in the Indonesian rupiah, again according to Bloomberg. But it has dropped. Given these ructions, “bonds start to lose their lustre as a peso play,” says Standard Chartered’s Ortiz.
Deutsche Bank’s Stephen notes how this has played out over the past few months. “Recently it’s been short dollar and long Asia, but that is beginning to reverse,” he says. “Investors have become more positive about the US and the currency, which means that there is more interest in US dollar products.”
In this light, and with admirable prescience, Purisima has been pushing the domestic onshore bond market, which grew by 19.8% year-on-year in the first quarter this year, according to the Asian Development Bank. And this despite high issuance costs of Ps812,500 plus 0.025% of issue amount for issuance of over P1bn and an approval time of six to eight weeks. “We don’t want our banks to be saddled with non-performing loans and create risk for the banking system. That’s why it is important for the bond market to grow,” he said in a speech at the ADB earlier in the year.
“The government has a lot of room for domestic players to increase issuance,” agrees HSBC’s Veloso. With the domestic market booming and a currency play taken out of the equation, all eyes for the rest of the year are likely to remain on the domestic market.