Philippine government ABS: pipe dream?

The Philippines government is once again evaluating a securitization deal to alleviate its debts. Among the assets being considered are natural gas and gambling revenues. Local bankers, however, have raised eyebrows at the news.

A previous plan in 1999 to securitize future receivables from the state-owned Philippines Amusement and Gaming Corp (Pag Corp) — which was mandated to Bear Stearns and Lehman Brothers — was scrapped because it was deemed impossible to market to domestic and international investors.

In addition, there are legal and taxation issues that make it extremely difficult to launch an asset-backed securitization (ABS) from the Philippines.

None of this seems to have deterred the government, for the time being at least. “There’s talk on the table of doing a securitization of future receivables from a number of government offices,” says national treasurer, Sergio Edesa. “We’re evaluating whether we can go into this, especially on the foreign side because of our relationships with creditors.”

Edesa also says proceeds from any deal would be used to clear its foreign debts. “This is not part of the process to clear our budget deficit,” he claims. “We’d be looking to raise at least $500 million which would take care of paying off foreign loans. Even more, it would lessen the need for foreign financing.

“We have had discussions with banks and we’re still looking at the proposals,” Edesa adds. “Gambling revenues from Pag Corp would be one of them, and receivables from the Camago Malampaya natural gas exploration project of which we’re part of a consortium would be another. These are just two of the projects.”

Edesa says it is a little too early to predict when any deal might come to market but feels that they would be close to making a decision on whether to take talks a stage further within the next two weeks.

If the transaction does see the light of day, it will come as a surprise to many local bankers, especially any issue backed by gambling revenues. “They haven’t been able to do it before and I think it’s another non-starter,” says one local US investment bank chief. “If, and it’s a big if, they were able to do something, it would be a lot easier to do a gas-backed deal than a gambling one. Most investors would be too sensitive to touch this, particularly foreign investors, and let’s just say it wouldn’t do much for the government’s international reputation.”

It’s still unclear whether any Philippine transaction could take place given the lack of any legal framework for ABS. In December, the Securities and Exchange Commission outlined preliminary guidelines on securitization that dealt with setting up special purpose vehicles.

These rules also stated that all ABS deals would have to be registered with the SEC and the minimum amount that any such deal could be. The guidelines also looked into areas such as credit enhancement and the need for regular and accurate deal reporting.

The noises were certainly positive, but given the recent political uncertainty and the fact that a securitization law has been talked of for several years, no news has emerged as to when the law will actually be passed.

In any event, many regional ABS professionals believe that the guidelines set out by the SEC do not go anywhere near far enough in really encouraging market development. Presently, SPV’s would still be liable to withholding tax and it is unclear whether they would be bankruptcy remote — one of the key characteristics to any ABS deal.

An analyst at Phil Ratings believes that the law is still someway off being conducive to potential issuers. “Both the SEC and the Central Bank have been working on draft securitization legislation but it is someway off from being resolved,” she says. “Trying to establish a special purpose vehicle under the current legislation is difficult. I certainly don’t think there will be a deal done this year at any rate.”

Even though the government accepts that it would be difficult to target international investors, some bankers believe domestic investors would also be wary of buying into the deal. “The political climate is still unstable and you have to question how marketable any deal would be to investors,” comments one banker.

“ABS investors buy these bonds because of the added security they offer. I’m not sure they will be confident that a Philippine issuer, let alone the government, can guarantee the performance of assets or the timeliness of payment.”