Banking sources said yesterday that the Philippines, the most active issuer of dollar-denominated sovereign debt in Asia, had mandated three international banks – Hongkong and Shanghai Banking Corp. (HSBC), UBS and Credit Suisse First Boston to sell a new bond due 2015.
The bond sale will be a litmus test of investor demand towards Philippines risk. The country has been beset by political uncertainty because of a looming presidential election in May, endemic corruption, a nagging budget deficit and a weak peso.
The government needs to raise at least $680 million from the offshore market to meet its 2004 funding needs, primarily its chronic fiscal deficit, which by January had grown 15.6 percent from the same month in 2003.
Bond fund managers said despite the political and economic risks, it was a good time to buy Philippine sovereign bonds, which offered attractive yields and were trading cheaper than other emerging market credits, even lower-rated ones.
BB-rated Philippine sovereign bonds due 2014 are currently quoted at 490 basis points (bps) over US Treasuries, about 16 bps wider than on Monday before the news of new supply emerged.
B-rated Indonesian sovereign bonds due 2014 were quoted at 398 bps over US Treasuries.
"Investors are paid for the risks. The environment for high-yield credits is good. The Philippine bonds are cheap versus comparables," said Singapore-based Desmond Soon, an investment manager at Pacific Asset Management.
But he also warned that investing in the Philippines was fraught with risks.
"I think the main concern is political continuity and the budget deficit....I tend to be a bit underweight on the Philippines."
Spreads tightened last week after the Supreme Court ruled Fernando Poe Jr was eligible to run in the May election, clearing the path for the popular movie star to battle incumbent Gloria Macapagal Arroyo for the presidency, and removing some uncertainty from the closely fought campaign.
This, along with a rally in emerging debt in the past week, has re-ignited investors’ interest. Many had been short on Philippine bonds.
"Going forward, the Philippine sovereign curve could see a rebound post issuance as the two major uncertainties hanging over the market – Poe’s election clearance and new issuance – will have been cleared," said Pieter van der Schaft, bond strategist at Barclays Capital.
Many investors say that although Arroyo’s economic record has been mixed since she took over the job in January 2001, after former president Joseph Estrada was ousted in a popular revolt, she’s more market-friendly than opposition candidates.
They are particularly wary of Poe because he has no political or economic track record, reviving fears of a replay of fellow-former-movie-star Estrada’s chaotic presidency.
"The Philippines is trading cheaper compared to its rating level. I think their fair value should be 50 to 75 basis points tighter than the current spreads," Van der Schaft said.
Last month, the government sought to raise around $500 million as part of a bond swap package that gave investors the opportunity to switch from maturing issues into a new 2011 bond.
But although investors agreed to swap more than $1 billion worth of old bonds into the new issue, only $120 million of fresh debt was raised.
"I think timing is good from their perspective as we had a rally in US Treasuries," said Irene Cheung, sovereign analyst at ABN AMRO. "Also, the Philippines has elections coming up and they would not like to do it closer to the elections."
The yield on the benchmark 10-year US Treasury note was quoted on yesterday at 3.7703 percent, compared to 4.03 percent on Friday prior to the release of US jobs data. – Des Ferriols