RP’s Eurobond offer falls short of target

The Arroyo administration was able to raise only Euro300 million from its Euro500 million Eurobond offer as the market reacted negatively to the possibility that the Philippines would be sanctioned by the Paris-based Financial Action Task Force (FATF).

The Eurobond offer was launched late Thursday night and sold to lukewarm investors with an annual coupon rate of 9.125 percent. The bonds were issued at a price of Euro99.375 for every Euro100 worth of bonds to yield 9.25 percent.

The Department of Finance said the transaction was the first Euro denominated bond offering by an Asian sovereign issue since 2001 and also the first Eurobond offer to extend beyond the five-year sector.

The lackluster reaction to the country’s Eurobond offer means that the government still has to resort to at least $900 million more in foreign borrowing in order to finance part of its P202-billion budget deficit for 2003.

Finance Secretary Jose Isidro Camacho told reporters that the order book stood at Euro450 million and the government decided to take the middle since the offer ranged between the Euro259 million minimum and Euro500 million, maximum.

Camacho admitted that the offer was weighed down by the expected fallout from the failure of Congress to pass the amendments to the Anti Money Laundering Act intended to make it compliant with FATF requirements.

The market was hedging against the economic impact of FATF sanctions, especially the fallout effect on the banking sector which would suffer the brunt of FATF sanctions.

According to Camacho, the reaction of the market was clear across the board and spread over the country‚s credit markets. "All our market reacted," he said.

As a result, the offer was under-subscribed, Camacho said the government decided not to take up the whole amount, saying that it was necessary to leave some level of unmet demand to make sure that the appetite of the market is not fully saturated.

The Eurobond offer was priced at 550 basis points over Euro-LIBOR (London Interbank Overnight Rate) and about 480 basis points over LIBOR.

Despite this, Camacho said the government decided to proceed with the offer since it needed in the event that a war breaks out between the US and Iraq.

"Our borrowings so far is still comfortable. After all, its still very early in the year," Camacho said. "We’re still hoping that sentiments will change."

The Department of Finance (DOF) had mandated Credit Suisse First Boston, Deutshce Bank and JP Morgan as lead managers for its eurobond float.

The government was also plans to issue $200 million worth of one-year, zero-coupon notes to raise funds needed to refinance some $125 million worth of maturing obligation and help bridge its P202 billion budget gap for 2003.

The Arroyo administration has also issued dollar-linked peso notes, expecting to raise at least P5 billion from investors eager to take advantage of the possibility of wide fluctuations in the peso-dollar exchange rate this year.

The peso notes would carry a three-year maturity period but the specific terms including the price and foreign exchange rate base, would be set once it has actually issued.