RP sells $200-M zero coupon bonds

The government sold $200 million of one-year, zero coupon bonds yesterday, raising the deal size from a planned $150 million, to refinance domestic borrowing and partly plug its bulging fiscal deficit.

The deal drew strong interest from local banks and onshore retail investors, with a few domestic companies, insurance firms, foreign fund managers and overseas banks also participating in the transaction, banking sources said.

HSBC, the sole lead manager for the deal, said the discount bond was sold at an issue price of 96.898 and would be redeemed at par. The notes mature on Feb. 5, 2004.

"This bond issue demonstrated the government’s commitment to manage its fiscal objectives and simultaneously meet investors’ requirement," Finance Secretary Jose Isidro Camacho said yesterday.

"Initially we launched it at $150 million and that went pretty quickly and we were all sold by yesterday morning. Interest and orders continued to filter through and took the potential deal size to over US$200 million," a source familiar with the transaction told Reuters.

This was the government’s second foray into the global debt market this year. Earlier this month, the government sold $500 million of 10-year bonds at a spread of 553 basis points over US Treasuries.

"The Republic has taken a reasonably responsible approach by doing deals in the one-year and longer dated segments as they are making sure that there’s a full yield curve there and not saturating any particular area of the curve," the source said.

Local banks, awash with cash, are mainly buyers of shorter-dated sovereign dollar bonds, while foreign investors like to purchase the nation’s longer-dated papers.

Unlike regular bonds, zero coupon bonds do not have coupon payments but they are sold at a discount to investors.

Funding the deficit

The bond sale comes as the government aims to meet its 2003 financing requirements estimated at P202 billion, or 4.7 percent of gross domestic product (GDP).

"I think they will be able to fund the deficit. There’s a lot of local liquidity and there’s no risk of default in the short-run," said Julian Wee, regional economist at IDEAglobal.

The government has projected 2003 net foreign borrowings at P95.281 billion and net domestic borrowings at P103.27 billion, partly to fund its 2003 budget deficit.

The government has said it would prefer to borrow more from the domestic market due to expected volatility in offshore markets over a possible US-led war against Iraq.

The government’s large fiscal gap remains the country’s biggest headache and the government’s inability to manage its finances has come under scrutiny from investors and rating agencies.

Rating agency Moody’s Investors Service said on Friday it would watch the Philippines’ revenue collections closely for the next few months before reviewing the country’s domestic currency rating.

Moody’s rates Philippines’ domestic currency at Baa3 with a negative outlook.