Investors not deterred by a flurry of deals in the Asian bond market
The Republic of the Philippines priced a $1 billion dollar bond late Friday (Hong Kong time), at the end of a hectic 24 hours in the Asian bond markets, which saw the completion of three other benchmark-sized deals?? sovereign from Sri Lanka, the largest Asian high-yield in more than a year from Indonesia's Adaro Energy, and another Korean offering from Korea Expressway.
The deluge of offerings had seemingly no impact on investor demand, however, with each of the deals being well subscribed.
The Philippines bond??he country's third dollar-denominated deal this year??ttracted over $5 billion of demand and more than 200 accounts, and around the time of the Asian close on Friday, the bookrunners??eutsche Bank, HSBC and UBS??elt confident enough to confirm that the size would be $1 billion and to tighten the guidance. The deal was initially announced in the US afternoon on Thursday at a size of $750 million to $1 billion.
One reason for the strong interest, according to sources, was the 25-year maturity. In Asia there hasn't been any dollar bonds with that kind of maturity for 18 months, which means investors with long-dated liabilities who tend to play this part of the curve were keen to make the most of the opportunity. The long end of the Asian curve in general has rallied lately and the volatility has come down; more specifically, there has been enough buying at the long end of the Philippines curve to suggest that there would be demand for another issue at that end. Indeed, the Philippines curve has been inverted at the long-end, making this a good opportunity for government to get long-dated funds at a reasonable cost.
One source noted that the debt market recovery is not stable enough that it can handle both longer dated issues and a greater number of deals, which partly explains the four issues at the end of last week. However, issuers are also aware that this favourable market sentiment will not last forever.
"This is not the final window this year, but we are coming up towards the final six to eight weeks of the year and the length of the windows are declining," the source said, noting that issuers that are planning to go to the debt capital markets are likely to try to do so sooner rather than later.
The Philippines launched its new 2034 bond in the Asian morning Friday, the initial yield guidance was around 6.5%. That guidance was tightened to 6.45% plus/minus 2.5bp at the Asian close and the deal was priced at around noon in New York at the bottom of that range. The coupon was fixed at 6.375% and the bonds were reoffered at 99.382 for the aforementioned yield of 6.425%.
The yield translated into a 216.5bp spread over the May 2039 US Treasury and was only 5bp wider than the Philippines' own 2032 bonds which, at the time of pricing, were trading around par for a yield of 6.375%.
As always for a Philippines offering, the domestic bid was strong, but the allocation to Filipino investors was much smaller this time (25%) than in July, when 40% of its $750 million offering was bought by domestic investors. Another 25% of this latest deal went to Asian investors outside the Philippines, while 37% went to the US and 13% to Europe. A strong US participation is common on long-dated bonds.
In terms of types of investors, banks took the majority, or 55%, of the paper; funds bought 34% and retail investors came away with 11%.
At the end of US trading on Friday, the new bonds were trading at 99.5%-99.625% of face value, implying a slight price increase versus the reoffer price.
The Philippine government had not been expected to return to the dollar market this year after it sold $1.5 billion of 8.5% bonds maturing in 2019 in January and another $750 million worth of 6.625% bonds maturing in 2020 in July??lthough there has been talk about a potential yen issue. However, the recent floods caused by a series of devastating typhoons have again put the government in a position where the budget deficit could be much larger than estimated earlier in the year. Government representatives told investors during the marketing process that it is also looking to pre-fund part of its 2010 foreign funding needs, which are estimated at about $2 billion.