PLDT plans to tap int’l bond mart anew

Telecommunications giant Philippine Long Distance Telephone Co. (PLDT) may once again tap the bond market later this year or when the timing is right‚ for much-needed funds to settle some $1.3 billion in loans that are maturing between 2002 and 2004.

Highly-placed sources told The STAR that PLDT was supposed to have issued as much as $500 million in notes during its recent offering, but decided to just settle for $350 million (despite a demand of around $1.575 billion) or risk lower yields.

PLDT last April 25 gained such strong demand for its $350 million two-tranche issue that it launched the deal days ahead of the original schedule of April 29. The offering was made to buy back around $320 million in notes maturing in 2003 and 2004 and create a healthier debt profile.

Alongside the deal, the tender offer is still underway for the company’s 2003 and 2004 transactions. The final deadline is May 15, but the early participation offer has been extended to May 2 to give retail investors more time to tender their bonds.

"Following the very strong demand for PLDT’s recent issue, and the high yields which were also partly due to the company’s decision to limit it to $350 million, there is no doubt that PLDT will go back later this year if not early next year and raise more funds," a top company official said.

Documents from Credit Suisse First Boston, one of the lead managers for the PLDT offering (the other was Morgan Stanley), showed that the deal now stands as the largest regional high-yield transaction since Asia Pulp & Paper’s deals in 1997.

With the transaction complete, PLDT has some breathing space to consider its future plans to deleverage itself. The company was able to secure a $149-million loan from Germany’s KfW and is expecting another $80-million loan from the Japan Bank for International Cooperation. Another $650 million is expected to be raised from internally generated funds, but the amount from cashflow remains to be seen.

Therefore, if ever the company goes back to the bond market, the amount will depend on whether or not any of its expected fund sources will materialize.

PLDT was supposed to sell a five-to 10-percent stake in wireless subsidiary Smart Communications before June this year but decided to postpone it. Officials said that while PLDT has an option to sell a strategic stake in Smart to another company, it is not planning to do so in the near future.

It was revealed that the April 25, 2002 deal, which was split into a $100-million May 15, 2007 (five-year) deal and a $250-million May 15, 2012 (10-year) issue, attracted very strong interest.The five-year tranche had investor orders of $575 million while the 10-year notes gained over $1 billion in orders, Credit Suisse revealed in a report. This, despite the rare occurrence of three other Asian deals being priced during the same week.

Although PLDT’s issue was expensive on a historical note, the success was vital for PLDT to stave off $320 million in redemptions and create a healthier debt profile. The company’s notes offering was launched hand in hand with a tender offer to buyback its $125-million 2003 and $204-million 2004 notes.

"PLDT did a very good job in convincing investors to support its plan which has really helped tighten the yields of the bonds in. Investor interest in the transaction began to build over the course of the roadshow, and it is a credit to both the issue’s management and to the country itself that the deal gained such strong demand," one observer familiar with the deal said.

It was also observed that the roadshows in Europe and the United States led by PLDT president and chief executive officer Manuel V. Pangilinan, had been a tremendously credit-intensive procedure of one-on-one interviews which only slowly built the momentum behind the deal.

"But in the last few days, the momentum suddenly grew exponentially, with more and more accounts trying to jump in. The level of interest reached the point when the leads cut the roadshow short because the book was too strong," a banker close to the issue noted.

In the end, the 2007 tranche had a yield of 10.625 percent or a spread of 522 bp over US Treasuries. The 10-year tranche was priced at 11.375 percent, or a spread of 630 bp.

Geographically, Asia provided the pillar of support for the five-year deal with 50 percent, while the US reached 40 percent and Europe, 10 percent. For the 10-year, the US dominated with 56 percent, while Asia and Europe got 27 percent and 17 percent, respectively.

Bankers said there are several reasons for the strong performance. "The fact that PLDT could issue the new tranches so tightly compared to its outstanding debt curve shows that investors bought into the company’s convincing explanation of the liability management exercise and the need to extend its maturities," one official said. The Asian demand for high-yield paper from corporates with good name recognition is also strong.

PLDT’s bonds used to trade at around 150 bp to 170 bp over the sovereign’s interpolated curve. Now, there is a gap of around 275 bp-300 bp between PLDT’s bonds and the interpolated Philippine sovereign.

While the banker familiar with the issue conceded that the issues look expensive on a historical basis, he argued that the whole exercise addressed the concerns that created the spread differential in the first place.

"PLDT looked to be damned if they did and damned if they didn’t. It had to pay what historically seemed to be high coupon levels, but it needed to do so to resolve the very concerns about its redemption profile that had weakened the spreads. With this deal done, PLDT’s spreads should begin narrowing once again," the banker added.