Exclusive: Philippines to stick to debt plan despite ratings upgrade - IFR

NOIDA, India, May 2 (IFR) - The Philippines will focus on the onshore market for its funding needs in 2013 rather than offshore even after the country sealed full investment-grade status with its second credit rating upgrade, Treasurer Rosalia de Leon said.

The upgrade opens the door to fresh foreign capital because the Philippines is now eligible to be part of indices used to benchmark tens of trillions of dollars in investments.

But in an exclusive interview with IFR, the treasurer said the new status would not sway the government's approach to using local markets for most of its Ps700bn ($17 billion) in sovereign funding needs.

"For 2013, all our funding will be coming from onshore," she said on the sidelines of an Asian Development Bank meeting in India.

Even if the Philippines does consider new offshore issuance to fund a buyback as part of managing its debt liabilities, the goal will still be to issue debt to foreign investors only in peso, the local currency, she said.

"We have skipped the opening curtain this year, and because of the liquid tone of the market, we continue to finance in the local market," she told IFR.

Her remarks came shortly after Standard & Poor's upgraded the Republic of the Philippines (RoPs) to BBB- from BB+, news that sparked a sharp rally across the yield curve.

S&P's move follows Fitch's upgrade of the Philippines in March to BBB-, giving the sovereign two investment-grade (IG) ratings.

It now qualifies to be part of the Barclays US Investment Grade and Global Aggregate and Asia Pacific IG Aggregate indices, as well as others from Citigroup and JP Morgan.

Funds that benchmark against them would have to buy Philippines sovereign debt (if they do not already own it) to reflect the underlying composition, but it is not clear what weighting the country might have in the key indices.

"Given the two upgrades, the Philippines can also be included in the global index," the treasurer said. "In terms of the demand for RoPs, there will be more interest - and it also give us a lot of interest from crossover investors who are not (only) investing in IG."

But she said there was no reason to change course from a policy of replacing shorter-term high-coupon debt with lower-yielding longer-term bonds, which has helped the Philippines secure full IG status.

The upgrade boosted prices of the sovereign's bonds in the secondary market. Outstanding 2030s, 2032s and 2034s jumped about US$1.50 to be quoted on Friday at 173.00/173.50, 137.15/137.65 and 141.50/141.75 respectively.

The higher prices mean yields on Philippine bonds, which were already among the lowest for sub-investment grade sovereigns in the world, will drop further.


The rise in Philippines bond prices as the country developed IG status meant that it became more expensive for the sovereign to buy back its own debt.

For example, the outstanding 2030s have a coupon of 9.5% but currently offer a yield of 3.62%. To buy them back ahead of their call date, the sovereign would have to pay the market price of 173.25.

The sovereign carried out an exercise in November to manage its liabilities, buying back US$1.5bn in high-coupon bonds using treasury funds and the proceeds of a US$750m-equivalent offshore peso bond. It is not clear how the Philippines could undertake a similar operation in the current climate.

"Prices right now, they have hit the roof," de Leon said. "So we have to see if we can do that exercise we did last year."

But even if there is new issuance in the offshore market to fund a buyback, De Leon stressed that the goal is to continue to issue debt to foreign investors in the local currency only, the country's policy of the past few years.

"If ever we go back to the market, the global peso note is one structure we will continue," she said.

Meanwhile, local investors may be the only ones to get a chance at dollar-denominated sovereign paper.

De Leon suggested that the Philippines may reopen its US$500m bonds due in 2023, which were issued in November last year to local investors only, or it may create a new local dollar benchmark.

Last year's bonds were issued to control the appreciation of the peso. Philippine banks tend to have very high dollar liquidity - due to the high level of remittances from Philippine nationals working abroad - so the creation of local sovereign dollar bonds has helped drain off excess hard currency.

"We continue to see a problem of capital surges," de Leon said, suggesting that was a key reason why 90%-95% of the Ps700bn of the sovereign's funding needs will be raised in the local market.

She said the Philippines this year also planned to issue inflation-linked bonds - an instrument now absent in the sovereign's debt portfolio - aiming at the "sweet spot" of 10-year maturities.

But de Leon noted there were still some hurdles to such issuance. "There are some regulatory approvals we want to secure," the treasurer said. "And (we need to) educate investors."


(Editing by Neil Fullick)