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Successful bond sale illustrates advantage of higher credit rating

May 18, 2019

FOR the second time, the Bureau of the Treasury’s (BTr) issue of so-called “panda bonds” has met with tremendous success. Administration officials have said this should be considered as a substantial vote of confidence in the Philippine economy and the government’s skill in managing it. They are absolutely correct.

A “panda bond” is a government bond denominated in Chinese renminbi (RMB) and offered for sale to overseas investors. The BTr usually offers bonds denominated in pesos or US dollars, but has occasionally offered them in other currencies; bonds denominated in Japanese yen, for example, are called “samurai bonds.”

The panda bond offer, the results of which were announced by the BTr on Wednesday, was the first major bond issue since the Philippines’ credit rating was raised one step to BBB+ by Standard & Poor’s earlier this month.

That rating upgrade undoubtedly contributed to the strong investor interest in the bond issue, but in this case, since the issue was targeted at Chinese investors, it (as well as the Philippines on a sovereign level) was vetted by a respected Chinese ratings firm, China Lianhe Credit Rating Co. Ltd. Lianhe assigned its highest rating of AAA to the 2.5-billion RMB ($362 million) bond issue, and gave the same rating to the Philippines, which bodes well for future bond issues by the BTr.

The high rating allowed the BTr to price the three-year bonds at just 3.58 percent, or only 0.32 percent over the benchmark interest rate, which is the hypothetical average rate of interest that an investor could expect to earn on comparable bond issues.

Those figures, which are understandably probably a complete mystery to people who do not regularly follow or invest in the bond market, represent the huge advantage the country has gained from its years-long effort to obtain higher credit ratings. A higher credit rating means that the country can borrow money at much lower interest rates. A bond, after all, is essentially a loan from an investor that must be repaid at a specified interest rate within a certain period of time.

A higher credit rating lowers the interest on a bond in two ways. First, it makes the benchmark rate lower. The latest panda bond issue had a benchmark rate of 3.35 percent; the BTr’s first panda bond issue for 1.46 billion RMB ($230 million) in March 2018 — before the recent S&P ratings upgrade — had a benchmark rate of 4.65 percent. Second, a better rating results in a lower spread, the amount of interest above the benchmark rate the bond issue has to be offered at in order to attract investors. Last March’s panda bond had a spread of 0.35, the latest one had a spread of 0.32.

All of this translates to millions in savings for the Treasury. If the latest panda bond had been issued at the same interest rate as the first in March 2018 — which was considered to be an excellent bargain for the country as it was — it would pay more than $5.6 million (almost P295 million) in additional interest over what it will have to under the new, lower rate.

The most positive outcome of the recent panda bond issue, however, may be the realization that the country will have further opportunities to obtain affordable financing for whatever needs arise. The 2.5-billion RMB offer attracted 11 billion RMB in bids from eager investors, meaning that there are far more willing creditors than the Philippines actually needs right now. That is an excellent financial position for the country to be in, and our economic leaders deserve credit for their hard work in achieving it.

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