Cut-price Philippine bond tender baffles market

A little-known investment firm in New York has surprised the credit market by offering to buy long-dated Philippine sovereign bonds well below the market price.

Applied Alpha LP has proposed to buy up to US$410m in principal amount of the Republic of the Philippines' long-dated US dollar bonds, namely its 9.5% senior notes due 2030, 3.95% bonds due 2040, 3.7% bonds due 2041 and 3.7% bonds due 2042.

Neither the offeror nor tender agent Idexis wanted to discuss specific details of the offer, but a banker said the tender price was about five points below where the bonds were trading in the secondary market. The tender prices drop in the last 10 business days of the offer to encourage bondholders to submit early.

When the tender offer opened on December 5 the 2030, 2040, 2041 and 2042 bonds were bid at high cash prices of 159, 114, 113 and 113, respectively, according to Tradeweb, and the offer prices for all four were above face value.

"The offer is meant to accommodate those holders who have little access to liquidity and whose ability to receive a cash payment would be seriously impaired by fees and expenses imposed on them by intermediaries," said Applied Alpha in an email when asked about the tender. "We understand that there exist many holders with small, odd-lot position which would like to take advantage of such an offer at a significant premium to par."

Even accounting for intermediary fees, it is likely holders would achieve a higher price by selling in the open market. If bondholders tendered US$410m of paper at a five-point discount, they would face mark-to-market losses, while Applied Alpha would be able to sell the bonds in the market for a quick US$20m profit.

"It didn't make any sense," said a fund manager who saw the offer. "We were all just speculating it was a US legal manoeuvre to prove there are no bonds at some specific price."

The offer expires on January 8, which is unusual timing, given that so many fund managers are away during the Christmas and New Year period and are unlikely to be willing to start the new year with an avoidable mark-to-market loss.

A company called Applied Alpha LP was incorporated in September 2018 and is registered at 4th Avenue in Brooklyn, according to New York Department of State filings. Google Maps data and property website listings show the registered address is a one-bedroom apartment behind a taco restaurant on the ground floor of a four-storey building.

In an email response, Applied Alpha said it was not based at that address, but in Manhattan. It did not say where exactly, and the website associated with its email address is blank.

Applied Alpha is understood to have conducted similar transactions before in other markets.

Picking these bonds for a tender offer struck some market watchers as a strange choice, as the Philippines makes the most effort of any Asian sovereign to keep its curve liquid. The Philippines frequently undertakes switch tender offers to allow bondholders to swap its less liquid dollar or peso bonds for new paper.

For instance, in 2017 it sold US dollar 25-year bonds and invited holders of 14 of its outstanding bonds to switch into the new issue, having carried out a similar exercise in 2015. That led some to speculate that the offeror was trying to buy up bonds in the hope that the sovereign would announce another tender offer.

These frequent opportunities to switch to newer bonds, combined with the low offer price, made it hard to see why anyone would want to sell their bonds in the tender.

"The only people who are going to sell at that price are people who do it by accident," said the banker.

(This story appeared in IFR on January 11 2020.)