By Morgan Davis
The Republic of the Philippines took advantage of Japanese investors’ hunger for yield when it returned to the samurai market in early August, allowing the sovereign to snag a tightly priced, four-tranche ¥92 billion ($863.4 million) bond.
The transaction was smaller than the Philippines’ 2018 samurai bond trade, which raised ¥154.2 billion from three tranches. That deal marked the sovereign’s return to the Japanese market after an eight-year hiatus.
With its return to yen last week, the country wanted to diversify its investor base and how it approached the market, says a source at the Philippines’ ministry of finance.
“It was a well-received transaction, and investors were pleased,” he adds.
The southeast Asian nation isn’t the only sovereign to tap the yen market this year. With the likes of Mexico, Malaysia and Indonesia also selling samurai bonds in the last few months, the Philippines found an engaged investor base in Japan.
Japanese investors “are looking for products that offer a decent spread on yield,” says Akihiro Igarashi, head of debt syndicate for Japan at Nomura. They like the diversity of BBB rated and sovereign credits, he adds.
“A few years ago, not many Japanese accounts could buy those credits,” says Igarashi.
But the low-yield environment has taken its toll on conservative Japanese accounts.
“They’ve had to change their investment style. Every time we bring an emerging market sovereign into the Japanese market, we see more and more investors participate.”
That was the case for the Philippines. Daiwa Securities, Mitsubishi UFJ Morgan Stanley Securities, Mizuho, Nomura and SMBC Nikko Securities were lead managers on the trade.
Every time we bring an emerging market sovereign into the Japanese market, we see more and more investors participate- Akihiro Igarashi, Nomura
The sovereign began courting investors in Japan on July 26, before marketing to offshore investors on August 30. The three-year notes were initially marketed at 20 basis points to 30bp over the yen swap offered rate, the five-year and seven-year bonds at 30bp to 35bp over and the 10-year bullet at 45bp to 50bp over.
When the offshore marketing began, the price guidance was set at 20bp to 35bp, 30bp to 40bp, 30bp to 40bp and 50bp to 55bp, respectively.
From then on, it was a question of juggling clear international demand for the Philippines with the needs of Japanese investors, who took a little more convincing.
“We were a bit cautious about the Japanese demand for the Philippines,” says Igarashi, explaining that the Philippines trades tighter than Mexico and Indonesia, despite having similar ratings. In addition, the southeast Asian country was keen to price its deal tighter than its samurai trade in 2018.
The deal was marketed to offshore investors over three days, with final guidance for the three-year, five-year, seven-year and 10-year tranches set at spreads of 23bp, 33bp, 45bp and 53bp over the yen swap offered rate.
The 2022 portion raised ¥30.4 billion with a coupon of 0.18%, the 2024 notes were worth ¥21 billion at 0.28%, the 2026 paper stood at ¥17.9 billion with a 0.43% coupon, and the 2029 bond was worth ¥22.7 billion at 0.59%. All of the notes were sold at par, at the same spreads as the final price guidance.
“Even with this very, very aggressive pricing we were able to get demand,” says Igarashi. “We were able to see great support from existing investors.”
While the country was pleased with the outcome of the transaction, the source at the ministry of finance says that it opted to raise a slightly smaller amount of money in exchange for a tighter price.
The Philippines has some funding obligations in yen, and plans to keep the proceeds from the transaction in the Japanese currency, says the source. While funding in yen is not necessarily cheaper than other currencies, it is “competitive,” adds the source.
More sovereign borrowers are also looking at the samurai market as a way of diversifying their investor base, says Igarashi. Most issuers have natural yen needs and do not swap the proceeds to their local currencies, he adds. Yen transactions tend to price a decent amount wider than dollar deals, making any arbitrage opportunities null.
Deal statistics for the Philippines’ transaction have not been released, but the ministry of finance source says that there was more demand from the Philippines when compared to its last issuance. The book reached a total of ¥130 billion.
The Philippines does not have any further funding plans for 2019 at this time, but it could return if there is an opportunity, says the ministry of finance source.
The senior paper will be rated Baa2 by Moody’s and BBB+ by S&P.