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Skip Navigation LinksHome :: Back Issues :: Napocor fails to electrify the market

March 2002

Napocor fails to electrify the market


Issuer: Napocor International Finance TrustAmount: $500 millionLaunched: February 1 2002, put on hold February 4 2002Lead manager: Bear Stearns




       
The $500 million seven-year bond issue for Napocor International Finance Trust, the soon-to-be-privatized Filipino National Power Corporation, had already attracted a lot of criticism before it was put on hold for the second time on February 4. Much of this stemmed from the issue's structure, variously described as "innovative" or "ill-conceived", depending on whom you ask.
The deal was initially intended for the fourth quarter last year but was delayed amidst poor market conditions following the attacks on the World Trade Centre in New York. The second attempt at the deal was embarrassingly abandoned at the eleventh hour by bookrunner Bear Stearns and co-lead JPMorgan while Philippines' president Gloria Macapagal Arroyo was in New York attending the World Economic Forum.
The bond was structured to include political risk insurance (PRI), which provides protection against the risk of convertibility and transferability restrictions being imposed, and the risk of appropriation. According to Mike Ellis of UBS Warburg in London, which has had some success with the structure, PRI can offer substantial benefits. "By removing the convertibility and transferability risk, you allow the dollar rating of an issuer with a high local currency rating to rise above the ceiling imposed by the sovereign's dollar rating," he says. "This allows the issuer to borrow at a lower cost and to attract higher-grade international investors."
The structure had proved popular in a number of recent Brazilian bonds, such as the $400 million Petrobrás International Finance Co issue in late January managed by UBS Warburg, Morgan Stanley and Banco Bilbao Viscaya. However, Asian investors, who were seeing the structure for the first time, were critical for a number of reasons.
First, they disagreed with the rationale for structuring the Napocor deal with PRI. Normally the PRI structure is used to allow strong corporates to attain a foreign currency rating for their debt that reflects their inherent creditworthiness. However, the credit rating of Napocor - which lost $157 million last year and has debts of $7 billion - is substantially based on its sovereign guarantee. One deal insider even says: "I don't think anyone is pretending that Napocor is a great company."
Secondly, investors were unimpressed by the Philippine peso-denominated sovereign guarantee for the US dollar issue. Normally a sovereign guarantee would cover interest and principal repayment in dollar terms. One insider defends the deal by arguing that "the peso guarantee was used so that the structure could build on the sovereign's local currency rating of BAA3/ BBB+, which is higher than its foreign currency rating of BA1/ BB+". Investors, however, were not convinced that the PRI (issued by Sovereign Risk Insurance) provided much real value - it didn't cover the principal and only protected coupon payments for 18 months - and so wanted the bonds to have a higher yield.
There were also concerns about the deal's liquidity. One investor thought that investors' unfamiliarity with the structure would have a serious effect. Liquidity was a particularly important issue for investors as there were doubts about ability to hedge the default risk. Investors feared that they would be unable to find any credit default swap protection sellers since the assets of the soon-to-be-privatized state-owned company would probably not be deliverable in the event of bankruptcy.
The deal was launched on February 1 and was reported to be on hold on the following Monday because of a lack of investor interest. Simon Paterno, JPMorgan's head of investment banking in the Philippines, attributes this to investors not "giving the Philippines any credit for the investment-grade rating of the bond. What investors seemed to want was the same pricing as they would have had without the PRI structure". Bear Stearns declined to comment.
Ed Del Fonso, CEO of the Philippines Power Sector Assets&Liabilities Management Corporation (Psalm), the body managing Napocor's privatization, blames the lack of interest on market uncertainties stemming from concerns about Enron, Tyco and Argentina, although investors that Euromoney contacted did not cite these as relevant issues.
Del Fonso also hits out at the negative media coverage of the deal. "There were a lot of critical statements regarding the issue during the roadshow, which might have affected its reception. Sour grapes from other investment bankers," he says.
A number of investors were puzzled and concerned about the choice of Bear Stearns as bookrunner for the deal, as the bank has limited experience in Asia and with the
PRI structure. Bear Stearns' last US dollar bond sale in non-Japan Asia was a $200 million issue for Bayan Telecommunications Holdings Corp of the Philippines in July 1999, a bond that later defaulted. The bank's experience with PRI-backed deals is limited to two mortgage-backed securitizations in Argentina, in February 2000 and February 2001.
One US investor who attended the roadshow in New York says: "I knew immediately that I wasn't going to be interested. The lead had no experience in emerging markets and no capability to do the deal."
The investor is also critical of the timing of the deal as it came soon after a flurry of PRI deals from Brazil that largely satiated the appetite of the limited number of high-grade investors that appreciate the structure. "Investors were also in no particular rush to get involved in Filipino transactions as they expect plenty more later in the year", he adds.
The fact that Bear Stearns laid off approximately 10% of its Asian workforce halfway through the roadshow also failed to inspire confidence, although none of the people involved in the deal was affected. An investor at the roadshow in Singapore thinks that the Bear Stearns team made a good effort to explain the deal but says that JPMorgan was not pulling its weight. This investor also cites doubts over the two banks' effectiveness in creating secondary markets for the issue as a reason not to participate.
The Philippines has been fairly active in the international debt markets and is attracting increasingly favourable attention from investors, which see it as an improving story. The success of president Arroyo in reining in the budget deficit and reducing inflation has given her and her team of respected technocrats increased credibility with international investors.
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