Philippines readies 1st global peso bond, orders strong-UPDATE 2

Trade the News

Thursday September 09, 2010 03:59:09 PM GMT

* Philippines' global peso bond issue at least $500 million

* Orders reach more than $2 bln so far-source

* Bond could be priced as early as Thursday - sources

* Initial price whisper 5-5.25 pct area vs 6.22 pct mkt rate

* Six banks mandated for sale

(Adds market comments, background)

By Rosemarie Francisco and Saikat Chatterjee

MANILA/HONG KONG, Sept 9 (Reuters) - The Philippines' maiden global peso bond offer of at least $500 million is attracting strong investor demand, and if successful could spur other countries in the region to issue similar bonds.

The issue, which would be Asia's first global local currency bond deal, may be launched as early as Thursday, market sources said, after Manila hired six banks to handle the deal. [ID:nHKX000057]

The sale has already attracted more than $2 billion in orders, another source said. The size of the final issue could be as much as $1 billion.

"It will appeal to many existing investors, but it will also attract new investors, both onshore and offshore," a Hong Kong-based banker involved in the deal said.

"It will also appeal to maybe a lot of rates and FX-focused accounts which may not typically be invested in the U.S. dollar paper."

The bonds, which will mature in 2021, will be exempted from payment of a 20 percent withholding tax for traditional local currency bonds, which foreign investors have frowned upon because there is no such tax in most other countries in the region.

The offer will be priced between 5 percent and 5.25 percent, another source familiar with the matter said. <************************************************************ To see the recent strong performance of Philippine bonds:

http://r.reuters.com/bur42p *************************************************************>

Rajeev de Mello, head of Asian investment at Western Asset Management in Singapore with $480 billion in global funds, said the Philippines has been a difficult market for foreign investors in local currency bonds.

"In Indonesia, there is no problem for investors to come in. Thailand, Malaysia, Singapore are all pretty straight forward. The Philippines imposes a very high withholding tax, other countries impose a low tax rate," he said.

ELITE GROUP

The Philippines, Asia's largest sovereign issuer of foreign currency debt, joins a small group of emerging market issuers who have stepped out of their home markets to issue bonds in their own currencies.

In April, Colombia sold $800 million of 10-year, peso-denominated global bonds at 7.75 percent. [ID:nN07164219]

In July, Chile raised $1.52 billion in 10-year bonds denominated in both pesos and dollars.

If Chile's orderbook and recent buying of local currency bonds in Asia is anything to go by, demand for Manila's new issue should be robust. [ID:nN2984453]

Foreign investors have pumped record sums of money into Asia's bond markets this year, citing its strong growth potential and low debt ratios, with net offshore ownership in countries like Indonesia and Malaysia hitting record levels.

Philippine bond yields held near the day's highs on Thursday on profit taking by local banks. The benchmark four-year bond yields <PHBD0567=> were up five basis points to 5 percent, moving further away from a record low of 4.92 percent hit this week.

The peso global bond deal denominated in pesos and payable in U.S. dollars will have an exchange rate <PHP=> assumed to be at 44.109 per dollar, one source familiar with the deal said.

One trader at a Manila-based bank said the proposed exchange rate and the withholding tax exemption for the bonds effectively translate into a peso yield of 5.25 percent compared to around 6.22 percent for the 10-year bonds.

Manila said it has mandated Citigroup <C.N> and Deutsche Bank <DBKGn.DE> as joint global coordinators for the sale.

Citigroup, Credit Suisse <CSGN.VX>, Deutsche Bank, Goldman Sachs (Asia) L.L.C. <GS.N>, HSBC <HSBA.L><0005.HK>, and J.P. Morgan <JPM.N> are joint bookrunners.

Finance Secretary Cesar Purisima has said Manila may regularly sell global peso bonds if the maiden sale was successful, as Manila wants to reduce its foreign exchange risk. More than two-fifths of the Philippines $104 billion outstanding debt as of June was owed to foreign creditors.

Bond proceeds will be used to partly finance the Philippines' expected budget deficit this year of 325 billion pesos, or 3.9 percent of GDP, a record in peso terms.

(Additional reporting by Karen Lema and Jun Ebias)

(c) Copyright Thomson Reuters 2010. Click For Restrictions. http://about.reuters.com/fulllegal.asp