This is the first time a Philippine state-owned entity is able to pierce through the Philippines’ foreign currency sovereign ratings ceiling of Ba1/BB+/BB+, by each of these three agencies respectively.
The achievement of these ratings will allow Napocor to access a significantly broader investor base than that which traditionally purchases debt issues from the republic.
US high grade investors, which can not participate in the purchase of Philippine credits due to the country’s sub-investment grade ratings, have expressed interest in the investment grade-rated Napocor issue. This investor base represents over a trillion dollars of capital that is normally not accessible to sub-investment grade rated borrowers.
The planned Napocor bond issue will allow it to tap this wider universe of investors at new issue yields which are lower than those at which the Republic of the Philippines is currently issuing.
Another ground-breaking aspect of the bond issue, is that it will have a designation of NAIC-2 from the National Association of Insurance Commissioners. This designation will open up the much coveted market of US insurance companies to Napocor. It is expected that by accessing the insurance company segment of the market, Napocor will achieve lower issuance costs than the republic, as the NAIC-2 designation will allow regulated insurance companies to use less capital reserves for a Napocor bond issue than for one from the Republic.
Bear, Stearns & Co and JP Morgan are joint lead managers for this $500-million offering which will be primarily targeted to US investors that are rating sensitive. The issue is enhanced with political risk insurance from Sovereign Risk Limited.
The republic’s guaranty on Napocor’s dollar-denominated bonds will be limited to the peso equivalent of Napocor’s outstanding dollar debt. The republic is relieved of having to issue a guaranty in dollars due to the provision of transferability and convertibility insurance from Sovereign Risk Limited.
The republic benefits from maintaining its guaranty as a domestic obligation in lieu of an external obligation. Investors on the other hand will be assured of receiving US dollars payments in the event of a convertibility and transferability event due to the existence of the insurance contract from Sovereign Risk Limited.
The rating agencies have limited coverage of this insurance contract, up to 24 months, representing a reasonable period wherein non-transferability and inconvertibility events would be expected to be resolved.
Napocor will use the proceeds to partially fund its 2002 funding requirements.