RP to float P29-B worth of Eurobonds

The government is in the market for E500-million (P29.07 billion) worth of Eurobonds as it considers several proposals that would help raise part of its funding requirement for 2003.

Market sources told reporters yesterday that at least eight banks have submitted proposals for the consideration of the Department of Finance (DOF) although the government has not given the mandate or made an award as of yet.

Finance Secretary Jose Isidro Camacho refused to comment on the report but said the government was still using its usual strategy of opportunistic borrowing. "When the opportunity arises, we will go to the market," he said.

According to banking sources, however, the DOF was already considering the possibility of issuing five or seven-year Eurobonds worth around E500 million. The proceeds would be used to bankroll part of the government’s budget deficit for 2003.

Already on the table is a plan to issue $200 million worth of one-year, zero-coupon notes to raise funds needed to refinance some $125 million worth of maturing obligations and help bridge its P202 billion budget gap for 2003.

The original plan was to issue $150 million of notes but the government decided to increase the issue to ease the heavy oversubscription triggered by the sheer lack of alternative investment channels.

The Arroyo administration has also issued dollar-linked peso notes, (DLPNs) expecting to raise at least P5 billion from investors eager to take advantage of the possibility of huge gyrations in the peso-dollar exchange rate this year.

The peso notes would carry a three-year maturity period but the specific terms, including the price and foreign exchange rate base, would be set once it has actually been issued.

DLPNs allow investors to hedge against the volatility of the peso against the dollar. If a bank or an investor bought P100 million worth of these papers, for example, they would earn a yield based on the prevailing rate of the three and five-year Philippine debt papers.

But the principal amount would be paid at the prevailing exchange rate at the time of maturity. If the peso falls in two to three years to a level lower than the time the investment was made, then the investor gets an additional return.

If the peso is stronger by the time the debt paper matures, then the government would have additional earnings.

The market’s seemingly insatiable appetite for DLPNs indicated their pessimism over the sustainability of the peso’s strength against the dollar since the only way they would make a windfall is in the event of a huge peso depreciation.

The BTr has just completed the issuance of some P5 billion worth of DLPNs, saying that the demand for the instrument had increased exponentially as the banking industry continued to suffer the absence of credit demand in the private sector.

Late last year, the government was able to get a relatively good price for its dollar-denominated notes as banks elbowed each other for a share of the P5-billion offer.

Pricing for the notes were concluded after a short book-building period, with the gross coupon rate set at 7.5 percent and the net yield set at 6.05 percent based on the morning average peso-dollar average exchange rate of P53.676.

The net yield was better than the 10 percent rate carried by the dollar-linked peso notes issued by the government last year.

This means that investors that obtain the notes from the banks would get a yield on their investment of 6.05 percent at the end of the three-year period.