The Department of Finance (DOF) announced yesterday that the issue was originally for $200 million but it was increased to $300 million with a coupon of 7.5 percent at an issue price of 99.794 percent to yield 7.550 percent.
According to National Treasurer Sergio Edeza, the government plans to file the necessary application for the securities to be listed in Luxembourg, in order to tap a cheaper source of funds.
Edeza said the transaction marks the beginning of the Arroyo administration’s pre-funding activities for future requirements, in order to avoid a possible cash crunch in the future.
"This year, the one reason we are able to reject throw-away bills at the Treasury bills auction is because we pre-funded the bulk of our requirements," Edeza said. "If we hadn't done that, we would have problems."
The auction committee has been engaged in a perenial tug of war with market players, with bankers on one hand testing the government’s cash position, and the National Treasury on the other hand, rejecting all pressures to allow T-bill rates to go up.
The $300-million bond issue would be handled by ING Bank N.V. which would act as sole bookrunner with joint leads composed of BDO Capital and Investment Corp., Equitable PCI Bank and Rizal Commercial Banking Corp.
According to Edeza, the decision to issue the bonds abroad allowed the government to access more favorable rates compared to peso-based instruments which he said have been fetching higher rates.
Edeza said market speculation on the Arroyo administration’s worsening deficit problem has pushed rates up in the local auctions, making domestic instruments much less attractive.
"This financing allowed the government to tap the shorter end of the yield curve where underlying US treasury rates are low and all-in yields are attractive for the Republic," Edeza said.
According to Edeza, the government will also be able meet untapped investor demand at a point in the yield curve where the government has no existing securities outstanding.
"As such, issuing five-year bonds will also help smoothen out the Republic’s debt maturity profile," Edeza said.
"This particular issue also has the lowest coupon we have ever achieved on similar tenors."
Edeza expressed optimism that the success of the transaction will demonstrate continuing and sustained investor confidence in the Philippines, despite its yawning budget gap that has made creditors and investors edgy in recent months.
The Arroyo administration has had to revise its deficit target for 2003, raising the ceiling from P98 billion to a whopping P143 billion; while trimming down growth projections from five to six percent to 4.5 to five percent.