IFR Asia: Philippines rush to lower tier two

IFR Asia – Asia special report – March 2012

Bangko Sentral ng Pilipinas, the Philippines central bank, had a heavy impact on the capital markets when it ended a moratorium on lower tier two issuance last year.

BSP Circulars 709 and 716, issued in early 2011, came after a hiatus in BSP 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 deals LT2 deals have been priced, with another in train at the time of writing, raising P34.5 billion (US$806 million) between them.

It’s noticeable that each deal has improved on the terms of its predecessor, as can be seen by working backwards from the most recent one. In February Philippine Savings Bank raised Ps3 billion (US$71 million) in 10-year bonds in a deal led by ING. It was a well-received deal: it priced at 5.75%, inside initial guidance of 5.875%, and was more than two times covered, closing a full week earlier than initially planned.

That deal followed the Land Bank of the Philippines in January, which raised Ps10 billion (US$231 million) in a deal upsized from a planned Ps6.5 billion; that deal, led by 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 Ps6.5 billion (US$150 million) in another deal to see its offer period shortened on the back of demand. This deal – 10 years and 3 months, with a call option exercisable by the bank after five years and one day – carried a 6.375% coupon, and was led by Deutsche and HSBC alongside Standard Chartered, BDO Private Bank and Multinational Investment Bancorporation as selling agents. BDO had already visited the market in June with a Ps8.5 billion lower tier two issue, priced at 6.5%. Around the same time, Philippine National Bank raised Ps6.5 billion in a 10-year non-call five deal, 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 who hold 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,” says 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 clear more widely than in the bank issues; a recent retail treasury bond offer from the Republic of the Philippines itself had a 20 year maturity. Investors are increasingly willing to extend the tenor of their investments.

And that suits the banks just fine. With Basel 3 likely to be in place by 2014, and draft implementing guidelines expected by the end of March, banks are thinking hard about their long term capital structure. The LT2 deals have allowed them to lengthen their maturity profile and match assets and liabilities. This is also part of the reason 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 Ps19.95 billion in this way, in five to seven year funding.

Bankers say they expect the Philippine banks to continue to take advantage of strong local liquidity; one expects a further Ps20 billion in tier two issuance and a further Ps20 billion in senior notes from banks this year. One still in the pipeline is 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 considering investments, or will need to refinance maturing obligations, which ought to add to the pipeline of peso bond issues.

“We expect that issuers will continue to take advantage of liquidity in the local market,” says 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.”