The Philippines’ central bank made a big impact on capital markets when it ended a moratorium on Lower Tier 2 issues last year. Liquidity in the country remains strong and investors believe the low interest rate environment will persist for the short to medium term and drive more issuances.
Source: Reuters/Romeo Ranoco
Young crocodiles scramble for ground fish fed to them by a Filipino worker at a government farm in Palawan.
Bangko Sentral ng Pilipinas Circulars 709 and 716, issued in early 2011, came after a hiatus in bond approvals that stretched back to the first half of 2010. Among other things, the circulars removed a provision about step-ups in interest rates and, in so doing, paved the way for 10-year Tier 2 issues. Since then, five LT2 deals have priced, with another set in train at the time of writing, raising P34.5bn (US$806m) in total.
It is noticeable that each deal has improved on the terms of its predecessor, as can be seen when working backwards from the most recent one. In February, Philippine Savings Bank raised Ps3bn via 10-year bonds in a, ING-led issue. It was a well-received paper, priced at 5.75%, inside initial guidance of 5.875%, and more than twice covered, closing a full week earlier than planned.
The issue followed that of the Land Bank of the Philippines in January, which raised Ps10bn via an issue increased in size from Ps6.5bn. The issue deal, via leads Deutsche Bank, HSBC and Standard Chartered, priced at 5.875%, having tightened from guidance of 6%.
The momentum in early 2012, followed a deal in September from Banco De Oro Unibank, the largest bank in the Philippines, which raised Ps6.5bn through a bond, for which the offer period was shortened due to robust demand. The paper with a tenor of 10 years and three months carried a call option exercisable after five years and one day – carried a 6.375% coupon. Deutsche and HSBC were the leads on the issue, while Standard Chartered, BDO Private Bank and Multinational Investment Bancorporation were selling agents. BDO had already visited the market in June with a Ps8.5bn LT2 issue, priced at 6.5%. Around the same time, Philippine National Bank raised Ps6.5bn through a 10-year non-call five bond, paying 6.75%.
The steady improvement reflects growing investor enthusiasm for the structure. Bank deals attract resident individuals and tax-exempt institutions, such as retirement funds. Residents holding the instruments for more than five years are exempted from a 20% withholding tax, which applies to investments in government securities and deposit accounts. Residents can buy either directly from the issuer through the branch network, through selling agents, or through trust accounts.
“Liquidity in the Philippines continues to be strong, and investors are starting to form a view that the low interest rate environment will persist for the short to medium term,” said Enrico Cruz, chief country officer for the Philippines at Deutsche Bank. “As a result, we are starting to see longer-tenor issues, as investors are willing to extend their investment horizons in order to achieve higher absolute coupon rates.”
Indeed, the thirst for duration is much clearer than in bank issues. A recent retail Treasury bond offering from the Republic of the Philippines itself had a 20-year maturity. Investors are increasingly willing to extend the tenors of their investments.
That suits the banks just fine. With Basel III likely to be in place in 2014, and draft implementing guidelines expected before the end of March, banks are thinking hard about their long-term capital structures. The LT2 deals have allowed them to lengthen their maturity profiles, as well as match assets and liabilities. This is also part of the reason why banks have issued onshore senior notes called long-term negotiable certificates of deposit (LTNCDs), which have a minimum of five years. Since 2011, three issuers have raised Ps19.95bn this way, in five- to seven-year funding.
Bankers say they expect banks in the Philippines to continue to take advantage of strong local liquidity. One expects a further Ps20bn in Tier 2 issuance and a further Ps20bn in senior notes from banks this year. A deal still in the pipeline is that of Development Bank of the Philippines, which had been expected to launch last year through BPI Capital, BDO Capital, Deutsche Bank and ING. On top of that, many corporate issuers are either considering investments, or will need to refinance maturing obligations, which should add to the pipeline of peso bond issues.
“We expect that issuers will continue to take advantage of liquidity in the local market,” said Cruz. “The adoption of Basel III, the desire to undertake longer-term asset liability matching, and upcoming refinancing needs will drive further issuance by banks this year.”
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