The central bank was already under pressure at home. Senator Edgardo Angara, chairman of the senate economic affairs committee, said on April 7 that the planned yankee bond issue was a mere scheme for the central bank to "window dress" its balance sheet. Angara, a former senate president, added that the bond would "only benefit the investment bank that will oversee the bond float".
The deal also drew flak from Action for Economic Reforms, a policy group composed of academics and non-government organizations, which said the central bank would end up paying interest of $118.75 million to $125 million a year: "The transaction is grossly disadvantageous to the Philippine government. Furthermore the Bangko Sentral's dollar reserves are at an all-time high, and it does not make sense to accumulate reserves by borrowing more."
The Bankers Association of the Philippines voiced its public support - rather embarrassingly on the day before the issue was postponed. Outgoing association president Rafael Buenaventura observed: "The $1.25 billion offering has been analyzed largely from its potential problems but little has been said of its possible upside gains." Incoming association president Deogracias Vistan, president of Solidbank, added: "There may be implicit advantages to the bond offerings which are not readily appreciated outside of the financial market." Central bank governor Singson had to defend the deal and justify it after Angara's attack in early April: "These will not be idle funds as we will reinvest the proceeds in instruments which have higher interest rates." The bonds, he noted, would set an important benchmark.
In a quip that proved to be all too prescient, Singson told a local press conference the impending bond float was like going to the stock market, you don't always get in at the lowest rate. Or at all, it would seem. The deal was launched by the central bank and not the republic because, according to Philippine law, the republic cannot issue beyond 25 years. This technicality aside, the central bank wanted an opportunity to assert its role in managing external debt. An objective of the bond was therefore to outshine its rival institution, the department of finance. That meant doing a deal more widely acclaimed than the department of finance's glory-grabbing Brady exchange issued last September.
One of the reasons the deal could not be slimmed down to $400 million was that this would not be as big as the $690 million Brady deal - arranged by the department of finance. And the reason why there could be no compromise on price was that the bond had to be tighter than the 225bp over treasuries that the Brady issue achieved. The deal was designed to be a set-piece in capital-raising. It was a long time in preparation, and its - perfectly legitimate - objective of being first in the 30-year issue may have got in the way of other potential borrowers.
State-guaranteed Napocor, which roadshowed in December, found that there was an appetite for a 30-year issue and asked the monetary board for approval. It could have launched a 30-year issue at 205bp over US treasuries, but the board insisted on a spread of between 190bp and 202bp over. In the end, Napocor launched a 20-year deal at 190bp over instead (led by Salomon).
Philippines Long Distance Telecom had a similar opportunity in February when emerging market spreads hit historical lows. It saw demand for 30-year paper but, failing to get an outright yes or no from the monetary board, issued 20-year bonds instead at 170bp over.
The competitive tension that exists with the department of finance also explains the peculiarity of the way the deal was mandated. For example, the Philippines' favoured son JP Morgan had to be included for all its work in the country, but it could not possibly lead the transaction, given that it had led the department of finance-sponsored Brady deal.
Morgan Stanley, though less well entrenched in Manila, was working in conjunction with a new consultancy, Lazaro Bernardo Tiv. One of the founding partners of this firm, Romy Bernardo, was formerly in charge of borrowing at the department of finance. He organized the Brady exchange just before he left, and such connections ensured a place at the table for Morgan Stanley. However, his associations with the rival department meant the coveted lead role would go elsewhere.
Salomon also has good connections in the Philippines. It has worked with local securities firm Buenaventura Filamor Echauz (BFE) since 1995. The two firms have an understanding by which BFE originates mandates and Salomon executes them. Such was the case in December when Salomon won the mandate to lead the Napocor yankee. BFE's name was included on the cover of the prospectus for that deal as advisor to the underwriter. It was similarly credited on the transaction for the central bank.
BFE was created in 1991. One of its senior partners is Eric Filamor, who spent 25 years at Citi, running the financial institutions group in Manila. One of his former protégés from Citi is Teddy Montetillo, who headed the yankee bond committee at the central bank.
The understanding with BFE developed, says Rowe, from a personal friendship he has with one of its founding partners, Cesar Buenaventura, the former head of Shell in the Philippines. The friendship dates back to Rowe's residence in Manila between 1977 and 1982 as group vice-president of the Private Investment Corporation of Asia.