PHL says ratings upgrade won't change debt plan

Noida, India — The Philippines has no plans for a net foreign issuance of bonds in 2013, even after being propelled to full investment-grade status with a second upgrade on Thursday, and will still meet almost all of its funding needs for the year in the local market, Treasurer Rosalia de Leon said. But she said the lower cost of borrowing that will come from the upgrade could see the country undertake liability management to get rid of some sovereign debt outstanding. "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 in an exclusive interview at the Asian Development Bank meeting after the upgrade was announced. "For 2013, all our funding will be coming from onshore." Her remarks came less than an hour after Standard & Poor's upgraded the Republic of the Philippines to BBB- from BB+. Following a March upgrade from Fitch to BBB-, the sovereign has two IG ratings and is now eligible 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. It is still unclear what weighting the Philippines might have in the key indices, but tens of trillions of dollars are benchmarked against these indices—and funds that benchmark against them would therefore have to buy Philippines sovereign debt (if they do not already own it) to reflect the underlying composition. "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 that there was no reason to change course from the policy—replacing shorter-term high-coupon debt with lower-yielding longer term bonds—that has helped escort the Philippines up to full investment-grade status. Announcement of the latest upgrade boosted prices of the sovereign's bonds in the secondary market. The outstanding 2034s jumped almost US$1 in price terms to 140.75 within two hours of the upgrade announcement. The 2032s and 2030s moved similarly, up to 136.65 and 172.85, respectively. The higher prices mean that yields on bonds from the Philippines, which already were among the lowest for sub-investment grade sovereigns in the world, will drop further. Expensive to buy But as those bond prices have risen in tandem with the country's steady climb up to investment-grade, it has of course become that much more expensive for the sovereign to buy back the debt. For example, the outstanding 2030s have a coupon of 9.5 percent but currently offer a yield of 3.64 percent. To buy them back ahead of their call date, the sovereign would have to pay the market price of nearly 173.00. In November, the sovereign carried out a liability management exercise, buying back $1.5 billion in high-coupon bonds using treasury funds and the proceeds of a $750m-equivalent offshore peso bond. It's 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 only in local currency—which has been the country's policy over the past few years. "If ever we go back to the market, the global peso note is one structure we will continue." Meanwhile local investors look like they may be the only ones to get a chance at dollar-denominated sovereign paper. De Leon suggested that the Philippines may reopen the $500m bonds due in 2023 that it issued only to local investors in November last year, or go ahead and 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 percent-95 percent of the P700 billion  ($17 billion) of the sovereign's funding needs will be raised in the local market. She said the Philippines this year also plans 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 are still some hurdles in the way to such an issuance. "There are some regulatory approvals we want to secure," the treasurer said. "And (we need to) educate investors." — Reuters