Asia’s Costliest Bonds Attract Union as Aberdeen Repelled

  • Premium on Philippine dollar notes is lowest in the region
  • Planned sale is the country’s smallest in at least two decades

Philippine President Rodrigo Duterte’s plan to sell his government’s first global bond is eliciting a tepid response from foreign investors as the nation’s existing dollar debt is the costliest in Asia.

A series of credit-rating upgrades won during the six-year rule of his predecessor, Benigno Aquino, saw the yield premium demanded by money managers to hold the notes over Treasuries shrink to the smallest among Asian sovereigns that issue dollar debt. Duterte’s administration, which took office following his landslide victory in a May election, plans to raise $500 million to plug next year’s budget deficit, according to Treasurer Roberto Tan. It’s also seeking at least 30 billion pesos ($644 million) this month from retail investors.

“Long gone are the days when the Philippines has to pay a premium on its bond,” said Edwin Gutierrez, the London-based head of emerging-market sovereign debt at Aberdeen Asset Management Plc, which oversees 301.4 billion British pounds ($401 billion). “We won’t get involved as the bonds simply have very little value.”

While Aberdeen Asset and Standard Life Investments say the narrow premium on the bonds makes them too expensive, Union Investment Privatfonds GmbH sees a “rare” opportunity to buy the debt of Southeast Asia’s fastest-growing economy. The size of the proposed issuance by the Philippines is its smallest in at least two decades. The nation tapped the international market only once each year after staying away in 2013. The investors spoke before Friday’s bombing in the southern city of Davao that killed 14 people.

‘Rare Issuer’

“Yes, we will look at the deal,” said Sergey Dergachev, a senior money manager at Union Investment in Frankfurt who helps oversee 13.5 billion euros ($15 billion) “The Philippines is a relatively rare issuer and fundamentally one of the strongest credits in Asia.” The small size of the planned sale also makes the “deal attractive in some way,” he added.

The nation’s dollar bonds offer an extra yield of 95 basis points over Treasuries, according to indexes compiled by JPMorgan Chase & Co. indexes. That compares with spreads of 238 in Indonesia, 207 in Malaysia and a premium of 204 for Asia.

Philippine bonds have handed investors an 11 percent return so far in 2016, extending gains to a third year, JPMorgan indexes show. Sovereign debt in Indonesia and Malaysia has rebounded from losses in 2015 to earn 19 percent and 8.8 percent, respectively.

After Friday’s bombing, Duterte declared a nationwide state of lawless violence, allowing him to use the military to assist the police to fight crime.

The government will go ahead with selling retail debt on Tuesday, Finance Secretary Dominguez said Saturday. Eduardo Francisco, Manila-based president of BDO Capital & Investment Corp. which is one of the six banks in charge of the sale, is confident that the bombing won’t impact the issue. “The economy and the prospects are strong,” he said.

The peso rose 0.2 percent to 46.54 per dollar as of 10:52 a.m. in Manila, prices from the Bankers Association of the Philippines show.

Shrinking Supply

A shrinking supply of global debt from Asia also burnishes the appeal of Philippine bonds. Dollar bond sales in the region, excluding Japan, have declined 9.1 percent to $107.3 billion this year through Sept. 5, according to Bloomberg-compiled data, as a weaker yuan and falling local borrowing costs prompted Chinese companies to raise funds domestically.

“Getting exposure to Asian sovereign credit in hard currency in the primary market is by far the most liquid, cheapest and best opportunity to get the bonds,” said Dergachev from Union Investment.

While Duterte’s administration prefers to fund its budget deficit with domestic debt, the government is well-positioned to tap the global bond market when the opportunity arises, Finance Secretary Carlos Dominguez said last week.

Though the Philippine government has yet to decide the timing of the proposed issuance, borrowers may rush to raise funds before the Federal Reserve increases interest rates. Issuers from Saudi Arabia to Russia and Brazil plan tens of billions of dollars in deals between September and U.S. elections in early November.

Wider Deficit

President Duterte has asked Congress to expand the 2017 budget by 12 percent to $72 billion so he can fulfill key election promises to increase spending on the police, education and infrastructure. That could widen the deficit to 478.1 billion pesos, or 3 percent of gross domestic product, from a projected 2.7 percent this year, according to a plan submitted to the House of Representatives last month.

Domestic demand for Philippine dollar bonds has also played a key role in shrinking the yield premium, according to Standard Life. Local banks buy the notes to put to work money remitted by Filipinos working overseas, which amounts to about 9 percent of GDP.

The proposed $500 million issue will replace a similar amount of maturing debt next year, so there will be competition for the securities, according to Kieran Curtis, the London-based investment director for emerging-market debt at Standard Life, which oversees $360 billion.

“We generally consider that spreads are too tight in Philippine bonds to offer an attractive return,” Curtis said. “It wouldn’t be high on our priority list right now.”

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