Buenaventura speaks: part 1

In a two part interview, Philippines Central Bank Governor, Rafael Buenaventura today speaks of the new Special Purpose Vehicle act and the impact it should have on reducing NPLs in the banking sector from 16%

How big a pool of NPLs do you envisage will be transferred to these special purpose vehicles?

The total non-performing assets of the banking sector is roughly Ps600 billion or $10 billion. If we are able to transfer about a third of that in the first 12 months we would consider that a real achievement. The hopefully, as it becomes more successful, the more difficult NPLs will be worked out. But, if we can do a third, I believe that will be good enough.

What do you believe will be the composition of the NPLs transferred? It is mainly going to be real estate-based?

No, I think there will be a lot related to companies that require restructuring, and refinancing. Clearly there were some companies that got overleveraged and this will allow them to be sold at a discount and provide some upside for the participants. Hopefully, they will be rejuvenated with increased capital. Many of the companies have good products, but just borrowed too much. A good example, is a car battery manufacturer that we have here, which is one of the biggest in Asia, but got into trouble by borrowing and then going into real estate. I am hoping that type of company can be restructured.

Of course, there NPLs will be some which will be real estate related.

Do you envisage it will be mostly foreign money that buys these assets?

Raphael BuenaventuraInitially, we thought it would be foreign. But there have been discussions which might involve joint ventures. Some of the local banks have also expressed an interest in participating. Of course, we have limited them to 5% equity holdings in SPVs, because we don?t want them to be conflicted. I am hoping it will be mainly foreign investment, because we do have a shortage of capital and it would be nice to attract foreign investment with this.

Reports have said Lehman Brothers will commit about $1 billion. Have other banks made similar commitments?

Yes, Lehman has indicated strong interest, as have quite a few funds, as well as the IFC. The challenge will be on pricing, and the differing expectations of the buyers and sellers.

Will the first set of assets sold be the highest quality ones - ie 60 cents in the dollar style assets versus 10 cents in the dollar?

I really can?t comment on this. But I suspect it will be a mixed bag. There will be a lot of haggling over the price.

What is the model for this NPL clean-up? Have you looked at Korea?

We have copied models from other countries, although what makes this a little different is there are no government guarantees. Obviously, the Philippine government is not in a position to provide guarantees on the subordinated debt that will be paid to the selling banks.

When the new SPVs buy the assets they will do so partly with cash and partly using subordinated debt that will be paid, assuming they can sell it. Over time, the selling banks will start to provision against this subordinated debt, if the underlying asset is not sold.

But this period will at least give them time for the economy to recover - before it finally has to be written off.

Also this difference is partly explained by the fact that both Thailand and Korea had larger NPLs than we have. Our reached a high of 18% and now it is 16%.

If, through this process, we can get that down to 10% in the next 12 months, that would be very good.

Looking at the regulations, it states that if land is involved, then it can only be bought by an entity that is 60% Filipino-owned. Will this not prove a problem for foreigners?

We are trying to find a couple of ways to solve this problem. Since the intent of the buyer is not really to hold onto the land, we may have to work out a joint-venture with a Filipino partner so that it will meet the constitutional requirement.

The other option is if create a structure where the land is availably by lease - a bit like those in London. You would be able to have a transferable 75 year lease, although you may not have actual title to the land. And if a Filipino eventually buys it, the title to the land can revert to them.

There are remedies, although it is not as clearcut as one would have thought. But since it is difficult change the constitution, we need to look for alternative structures.

Obviously, a critical part of resolving NPLs is through the legal system. Have you heard concerns from some of the foreign funds that they wonder whether the Philippine legal system will be equipped for the task?

In the case of the non-performing assets it is more or less resolved - because the banks become the owners of those assets, so there is no legal question. It is the sole owner and therefore can sell.

When it is a non-performing loan, we put in safeguards that the debtor is able to make an offer to the bank. If after 90 days this offer is not made good, then the bank is the legal owner and can foreclose. The bank can then sell it to an SPV.

Is it hoped this law will restore foreign confidence in the Philippines?

Of course, an investment in SPVs is a good sign that people will invest and it restores confidence. Possibly, more important is the ability to clean up the balance sheet of banks.

Tomorrow: Buenaventura talks about this year?s borrowing, Napocor and the budget defecit

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