Philippines Cuts Interest Costs on 10-Year Bond Exchange

The Philippines priced 140 billion pesos ($3.2 billion) of 10-year bonds in its first debt exchange in three years, allowing the nation to cut interest payments and set the stage for sustained economic growth.

The peso notes due 2024 were priced to yield 4.125 percent, the Bureau of the Treasury said in a statement. That’s less than the 4.3 percent yield on existing securities maturing in August 2024, a midday fixing from Philippine Dealing & Exchange Corp. shows. The swap for shorter maturities will save around 1.31 billion pesos in the first year, funds that can be used to support growth, according to the statement.

“This domestic liability management exercise gave our investors the avenue to exchange liquid bonds with new benchmark bonds, which will trade more efficiently in the debt markets,” Finance Secretary Cesar Purisima said in the statement.

The debt exchange was the first since the government conducted a peso-denominated swap in July 2011 and is aimed at helping to reduce interest expenses. President Benigno Aquino’s strategy of narrowing the budget deficit and extending bond maturities was rewarded by Standard & Poor’s in May, when the ratings company upgraded the Philippines to its second-lowest investment status.

‘Well Priced’

The government accepted 121.7 billion pesos in eligible bonds in the exchange from existing holders and 9.40 billion pesos in bids from new investors, according to the statement. Aggregate tenders totaled 240.5 billion pesos. The swap size was higher than an initial plan for at least 60 billion pesos, while the yield went up from the minimum 4% targeted.

The average coupon on the accepted bonds fell by 157 basis points, or 1.57 percentage points, the statement showed. The eligible securities accepted for exchange into new benchmark bonds saw the average maturity lengthened by 5.2 years.

“It’s well priced, which just shows the appetite of the market for medium-term maturities,” Roland Avante, president of Philippine Business Bank in Manila, said in a phone interview. “It protects the long-term bonds as well. The risk premium on debt due in 20 years or more is well maintained.”

Excluding the current exchange, the country has issued 945 billion pesos of bonds in swaps since 2006. The latest transaction was managed by HSBC Holdings Plc, Land Bank of the Philippines, BDO Capital & Investment Corp., BPI Capital Corp., Development Bank of the Philippines, and First Metro Investment Corp.

Achieved Objectives

The yield on the Philippines’ two-year benchmark sovereign bonds has climbed 35 basis points this quarter to 3.20, according to prices from Philippine Dealing & Exchange Corp. The 10-year yield increased 11 basis points over the same period.

The results are “within the vicinity of market prices,” said Manila-based Rafael Algarra Jr., executive vice president at Security Bank Corp. He said the government’s move was positive for the market as it will improve trading.

“Our collaborative efforts have given us the opportunity to realize cost-competitive funding and improve our debt portfolio,” Treasurer Rosalia de Leon said in today’s statement, adding that the deal achieved multiple objectives.

The Philippines will meet its growth target of 6.5 percent to 7.5 percent this year, Economic Planning Secretary Arsenio Balisacan said at Senate hearing in Manila today.

Finance Secretary Purisima said in an interview with reporters that the government is always looking at opportunities to manage the nation’s debt.

“Liability management is something that has to be done proactively, and we’ll continue to do that,” he said.

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