The Republic of the Philippines is preparing for a debut US dollar offering in ESG format, as banks drive increased issuance of such bonds in the local currency market.
The country has mandated Bank of China, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, Mizuho Bank, Morgan Stanley, Standard Chartered and UBS for the US dollar bonds, according to a source aware of the development. It is looking to raise US$1bn to US$2bn from medium to long-term bonds.
The sovereign's green bond would be issued under a sustainable finance framework that was launched on January 13 to support the country's target of reducing greenhouse gas emissions by 75% by 2030 from the 2020 level.
“The Philippines set up this sustainable finance framework to further highlight and align its ESG efforts in the global capital markets. It will help solicit additional demand from ESG investors and diversify its investor base,” said a DCM banker from a foreign bank.
Funds from a green bond issue would be used for capital-intensive climate adaptation and mitigation projects in the face of worsening global warming, finance secretary Carlos Dominguez III said in a release in November last year as the framework was being finalised.
Standard Chartered and UBS were joint structuring advisers for the inaugural framework, which is aligned with the International Capital Market Association's green and social bond principles, as well as the Loan Market Association's green and social loan principles, according to ESG consultancy Vigeo Eiris.
The proposed deal would follow ESG-themed issues by other Asian sovereigns such as South Korea, Indonesia, Malaysia and the Hong Kong Special Administrative Region.
Domestic issuance
The Philippine government issue would set an example for domestic borrowers, as many explore ESG angles for their future funding strategies and business plans.
For example, Rizal Commercial Banking Corporation plans to issue sustainability bonds in the offshore market when market conditions are favourable, as the bank saw decent demand for such notes in the peso market, said Horacio Cebrero, senior executive vice president and treasurer at RCBC.
The RCBC board on January 31 approved the issuance of foreign currency denominated senior notes off the bank's MTN programme.
The issue of sustainability bonds is also in line with the central bank's aims. On November 12, Bangko Sentral ng Pilipinas published a roadmap that aims to make sustainable finance mainstream. Banks are encouraged to create and structure sustainable finance products, and disclose such exposures under the roadmap.
"Financial institutions like us have taken it upon themselves to raise sustainability bonds because that is what the regulators want to see and that is what the government is trying to do, even though in the initial stages there are no incentives to do so," said Cebrero.
Strong demand
On January 28, RCBC priced 2.25-year fixed-rate peso-denominated ASEAN sustainability bonds at 3%. It has not announced the final size of the deal yet, but the issue was four times covered compared to the base size of Ps3bn. There is also an option to upsize.
BDO Unibank is also considering raising more sustainability bonds and other ESG-themed bonds in the future if there is a need to finance or refinance additional eligible projects under its sustainable finance framework, according to Luis Reyes, head of investor relations and corporate planning.
The lender printed Ps52.7bn (US$1.02bn) two-year sustainability bonds at 2.9% on January 28, which was the Philippines' largest domestic bond offering by a financial institution or corporate.
The combined peso issuance by BDO Unibank and RCBC, once the final size is announced, will be the highest annual issuance total for ESG bonds in the local currency market. Last year, Philippine issuers raised the equivalent of US$103m from ESG peso bonds and US$553m from offshore ESG US dollar bonds, according to Refinitiv data.
Fitch expects more banks to issue sustainable bonds because recent issuers have achieved competitive coupons, and there is market demand from all stakeholders. "The regulatory framework and market infrastructure are increasingly supportive of increased take-up," said Willie Tanoto, director for Asia-Pacific financial institutions at Fitch.
Last week, AYC Finance, a unit of Ayala, sold a US$100m issue of 10-year social bonds to International Finance Corp, in the first Philippine issuance earmarked for healthcare-related purposes.
While the ESG theme has gained momentum in the local bond market, the issuers are yet to see any pricing benefit or incentives from the central bank.
"Possible incentives would be lower risk weights or alternative compliance with Agri-Agra Law requirements for loans granted under the sustainable finance framework," said Reyes at BDO Unibank. Under the Agri-Agra Law, lenders are required to allot 15% of their loan portfolio for agricultural loans.
Some are hoping for other incentives to bring down funding costs for banks that raise ESG funds.
"The BSP can lower the cash reserve ratio, or give some incentive or relief, which can bring down intermediation costs for the issuer to raise sustainability bonds," said Cebrero at RCBC. "The regulators can also mandate government institutions to put certain investable funds in sustainability or green bonds which will create a snowball effect on demand and push down the price."