Psalm finally began to deliver on its promise to become an active domestic issuer this year, but political upheaval has since rocked its funding plans.
Power Sector Assets and Liabilities Management notched up its first peso-denominated retail bond in April, raising Ps30bn (US$674m) in a deal that Development Bank of Philippines, First Metro Investment Corp and HSBC jointly lead-managed. The deal was 1.7 times oversubscribed, as total tenders reached Ps33.7bn.
“We were able to take advantage of the cash-rich domestic market and the low interest rate environment, which allowed us to increase the size from Ps20bn to Ps30bn at pricing levels tighter than the company was initially seeking,” said one banker on the deal. Sold through a Dutch auction, the deal was split into a Ps11.32bn five-year tranche and a Ps18.68bn seven-year tranche paying coupons of 6.875% and 7.750%, or 36bp and 43bp above the five- and seven-year PDST-F, the local benchmark, respectively.
“The timing of this issuance was perfect as Psalm took advantage of the deep liquidity in the domestic financial system,” said Jose Ibazeta, acting energy secretary of the Republic of the Philippines. “The success of this landmark transaction is a clear indication of the public’s confidence in both Psalm and the power sector, in general”.
However, Psalm’s retail bonds are fully guaranteed by the RoP, which raised questions as to how investors will react to the credit. Was it a new name, or the same cash-strapped, quasi-government power sector story that investors had seen before? The guarantee also makes any borrowing hugely political – especially when this issue was launched less than a month before the presidential election that would unseat Gloria Macapagal Arroyo and usher in a new leader, President Benigno Aquino Jr.
In June, national treasurer Roberto Tan confirmed that he was “worried” that the power sector would “eat up” too much of its sovereign guarantee budget for the year, and suggested it should, instead, look to the local market. Republic Act 4860 limits the total amount of debt the government can guarantee at any given time.
“The government, through Psalm, wants to privatise its power assets, saying the energy business is better left with the private sector, but, as always, it is not leaving it much room when it comes down to the nitty-gritty of being allocated funding,” says one Manila analyst. “This is a longstanding bone of contention between the treasury and the power sector going back to the days of the brown-outs in the 1990s, when the failure to keep the power on in factories and offices drove foreign direct investment away from the Philippines.”
Having been a big issuer in the international bond market in 2009 – through a debut US$1bn 10-year deal last May and then a US$1.2bn exchange offer in November, including new debt of US$600m – Psalm looked to be on its way to becoming an established international credit. It still has debt of US$1.2bn maturing this year and a further US$1bn due in 2011, which it had planned to refinance offshore – or so Psalm executives thought.
An ambitious asset-backed securitisation deal intended to establish a template for similar financings has yet to get off the ground, despite being lined up for launch at least twice since the end of last year. Psalm had also been hoping to launch a US dollar issue this year, but first ran into problems in securing a guarantee from the government, which has its own funding requirements. Then Psalm’s whole borrowing position was undermined when the new government questioned the entity’s “borrowing binge”.
In August, finance undersecretary Jeremias Paul told reporters that Psalm’s financial requirement for 2010 had been fully covered. “I don’t think there would be pre-payment [for 2011], it may be more on liability management,” he said. “But, if there is an opportunity, why not?” The energy ministry, under whose auspices Psalm operates, is now reviewing the borrowings.
“Those planned borrowings will be on hold, for both Napocor and Psalm,” said Rene Almendras, the new energy secretary, in August.
However, if recent events are any guide, the company may yet return to the capital markets. Emmanuel Ledesma, who was appointed Psalm president in September, was an investment banker for 20 years and most recently managing director and country head at Royal Bank of Canada.
The ABS offering remains outstanding. The deal was to make up the first tranche of a securitisation of deferred payments from National Grid Corp to Psalm in exchange for the right to operate National Transmission Corp, the sole transmission grid in the Philippines. However, it has been pushed back repeatedly. Standard Chartered and Development Bank of Philippines originally marketed a Ps40bn deal to investors last November with close expected ahead of Christmas. It was then reduced in size at the end of January and again in February as investor interest unravelled. It has still not come to market as yet.
Fortunately for the Philippines, Psalm’s successful local currency debut has reduced the urgency attached to that deal, as well as other funding plans.
Nick Parsons