Going back to the market one more time

The Republic of the Philippines has issued a e500 million ($444 million) bond, increased from an original target size of e250 million, maturing in December 7 2006. The issue was priced at 99.865% with a coupon of 9.375% and a yield of 9.41%. The spread over euribor is 500 basis points. Deutsche Bank, UBS Warburg and Salomon Smith Barney acted as lead managers.

Despite having said that it would not borrow further this year, the government is issuing this debt to help refinance the state-owned National Power Corporation (Napocor).

The Philippines has combined public and private external debt of $50.8 billion and the market is concerned about its rising debt levels. The government, however, excludes Napocor from the national borrowing programme. Jose Isidro N Camacho, secretary of finance for the Philippines, explains that: “Napocor has always had to finance itself. Normally we would ask them to do it and we would provide a guarantee. If the spread gets too wide we normally step in.” Basically, Napocor’s debt is a contingent liability for the sovereign but isn’t a direct borrowing obligation.

The mandated firms suggested that the finance ministry raise the money and pass it on to Napocor, rather than the government guaranteeing the debt issued by the power company, because it is a more efficient way to raise capital.

Although the government insists that it does not expect to issue further debt for 2001, the market can still expect to see a dollar-linked domestic issue and a one-year peso/dollar swap for which mandates were awarded earlier this year.

The privatization of Napocor is planned for next year. With such a great need for Napocor to recapitalize, 2003 may be more realistic.

The success of this privatization is of great importance. The country’s target for privatization proceeds for 2001 is Ps7billion ($135 million). But as of September it had only managed Ps709.4 million. If Napocor isn’t privatized, the government will be forced to borrow even more for the power company.

Perhaps surprisingly, CSFB is advising the government on the privatization. As Euromoney reported in September, it is understood that CSFB was awarded a mandate in July to do a 10-year $350 million global bond deal.

CSFB is said to have underwritten the transaction at an unrealistic spread in what one banker describes as: “a hugely Tarzan-style breast-beating attempt to win business”. Spreads had already widened on the day the mandate was awarded.

This was closely followed by bad news from Argentina and spreads widened even further. This could prove expensive for CSFB. It is rumoured that CSFB has decided to take a 15-year puttable bond. The government will be forced to face the put some time next year. Bankers suggest that CSFB has taken the deal on to its own books and will be looking to refinance it through private placement. It looks as if CSFB was given the privatization in return for taking the hit. CSFB declines to comment.

Camacho complains: “When the media finds out a proposal has been submitted, it is mistaken for a mandate and this confuses investors.” US regulations prevent the government from commenting specifically about the CSFB deal.

The borrowing requirement for next year is Ps272 billion, half of which the government hopes to raise domestically. The budget deficit target for this year is Ps145 billion – which looks likely to be met – compared with a target of Ps130 billion for 2002. The government hopes to reduce the debt-to-GDP ratio – external debt is about 75% of GDP – through fiscal discipline and more innovative borrowing. It has, for example, dabbled in a floating-rate dollar swap and zero-coupon bonds this year.

Short-term debt is about 10.6% and medium to long-term is 89.4%. The government feels this is very manageable and Camacho says: “We want to continue to lengthen our internal and external maturity profile.” Currently, the most liquid deal the sovereign has is a 2010. It also has deal out to 2025. A senior banker comments: “The Philippines probably has the most developed yield curve of any Asian sovereign so they probably don’t need to go out any further in terms of maturity. What they should do is look at increasing liquidity. The 10-year they’ve currently got is about 18 months old and beginning to get relatively illiquid.” Camacho says the key to the Philippines’ strategy is implementation, which it plans to do by way of good governance, greater transparency and speed. He adds that the government is open to public consultation.

Camacho says the strategy is to target the whole economy. It will strive to create jobs to tackle poverty and to provide an economic infrastructure to encourage foreign direct investment. For example, it has introduced measurable objectives for government agencies in an effort to decrease red tape for investors. It will also address the physical infrastructure and aim for a stable macroeconomic environment.

In a positive step for the country’s economic development, the Electric Power Industry Reform Act – previously the Omnibus Power Bill – was brought into effect in June this year. The legislation aims to lower power costs and make the power industry more competitive.

In so doing, the government hopes to attract foreign investment to the power sector, with Napocor as the case in point. Further legislative action includes the passing of the Anti Money Laundering law in September, in an attempt to curb such activities.

The government maintains that it is committed to structural reform to develop its capital markets and strengthen the banking sector.

The new government’s plans for reform include amending the Central Bank Act to promote the stability of the banking system, establishing a regulation scheme for mutual funds, supporting private sector asset management activities and rationalizing rates of taxation on the financial sector.