Broadening appeal
The Republic of the Philippines’ debut sukuk was a win for both the sovereign and investors, as the landmark bond offered access to a new liquidity pool for the issuer and welcome diversification for sukuk buyers.
The US$1bn 5.5-year sukuk was part of the Philippines’ effort to strengthen its ties with the Middle East, and required it to pick the right structure to suit investors.
The sovereign and its joint bookrunners Citigroup, Deutsche Bank, Dubai Islamic Bank, HSBC, MUFG and Standard Chartered chose ijara and wakala with commodity murabaha components as the sharia principles, with the incorporation of different components providing flexibility with an asset-light structure. A typical sukuk involves only one component.
It also picked the perfect timing for the issuance. The mandate was announced on November 27, even though it would have been understandable if the sovereign had waited for the more traditional issuance window of January.
Market sentiment in late November had improved as Treasury yields fell on expectations that US rates had peaked, providing a strong window for issuance. The Philippines conducted two days of roadshows, talking to more than 100 investors, and received strong indications of interest before opening the book on November 29.
The response was overwhelming. The sukuk received strong bids from the Middle East and brought in new investors, meeting the Philippines’ objective of opening up a new liquidity pool.
The Middle East accounted for 30% of the final US$3.8bn orders, while the US took up 19%, Asia 14%, and Europe 37%. It was also a high-quality order book with fund and asset managers accounting for 60%, banks 24%, central banks, official institutions and agencies 8%, pension funds and insurers 7%, and others 1%.
With the strong demand, the Philippines managed to price the bond at Treasuries plus 80bp, which leads said was flat or 5bp inside its conventional bond curve. It was the tightest spread of any RoP notes with a similar tenor, and the tightest level achieved by an ASEAN sovereign with similar tenors in the past two years.
For investors, the issue offered a great opportunity to diversify away from Saudi Arabian credits, which are expected to make up most of the sukuk supply in the coming years. The strong response is likely to encourage other high-grade Asian issuers to explore offshore sukuk issues.
The Philippines’ debut sukuk picked a smart structure and achieved low pricing and investor diversification, making it the winner of best Islamic Deal and Philippines Capital Markets Deal.
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