Philippines battles to keep credit lines open

Criticisms over the Philippines'' rediscount facility are groundless, some analysts say.

Criticism ofáthe central bankÆs recent action to free up funds for the nationÆs faltering investment houses is unfair, some analysts say.

The Philippines announced on Monday that investment houses could liquidate up to 60% or Ps32.2 billion ($740 million) of their existing holdings of commercial papers. Banks are expected to buy the papers from the investment houses and discount them, giving the houses much-needed cash. The banks, in turn, are expected to pass the notesáon to the central bank.

Local newspapers take issue with the ruling that only triple-A rated papers, or 60% of the papers in the market, would be bought from investment houses. The newspapers suggest that asáthe Philippines Ratings Service Corp only rates papers at their point of issue, the ratings cannot be trusted. The agency insists, however, that it re-examines existing issues annually and supplements its findings with internal visits.

ôWe rate companies when they issue papers. We regularly monitor them and we publish a monitoring rating once a year. Companies are required to submit quarterly financial statements to us and that goes towards our internal findings,ö says Santiago Dumlao, president of the Philippine Ratings Service Corporation, adding that the agency is considering making quarterly findings public.

The media's criticisms are unfair, several analysts told The local agencyÆs ratings may differ from international bond rating agencies, but they arenÆt that different. Standard & Poor's (S&P), for example, gives ManilaÆs long-term commercial paper a triple-B rating.

ôLocal currency papers in the Philippines are of investment grade. But the number of foreign investors that can buy into its papers may be quite limited, because of restriction on foreign currency risk, or compliance issues,ö says Takahira Ogawa, S&P's Asia-Pacific director of sovereign ratings in Singapore.

Long-term commercial papers in the market include those of groups like San Miguel Corp, the PhilippineÆs largest brewery, and the Ayala Corp. ôItÆs really a liquidity crisis, not a solvency issue,ö says Richard Tan, analyst at Kim Eng Securities in Manila. "This helping hand provided by the central bank will restore confidence in the financial system."

The PhilippinesÆ investment houses have been trapped in a liquidity crisis for the past few weeks. The houses, a cross between investment banks and investment trusts, typically provide much of the short-term lending for PhilippinesÆ conglomerates. ThatÆs the reason why the central bank wonÆt riskátheir collapse, and the reason itáapproved a rediscountáfacility to provide them with funds.

Domino effect

Among the investment houses already reeling are Westmont Investment Corp (Wincorp); Urbancorp Investment Incorporation; East Asia Capital Corp; Corporate Investments Philippines, Inc; and All Asia Trust and Capital Corp.

ôThe rediscounting facility is in the interests of the Bankers Assocation. Some of the member banks have affiliates that are investment houses. Providing a pool of funds is a way of supporting them,ö says Dumlao.

Like all liquidity crises,áthe problem began with one financial institution û Wincorp ûáafterárumours spread that it faced liquidity problems. Those fears led to withdrawals, or preterminations, a uniquely Philippine term, and it was only a matter of time before a domino effect took place. All Asia Trust was the next to fall, because of a related concern. After that, nearly every other house had a deposit crisis on its hands.

The central bankÆs decision to keep credit lines open so that a wave of defaults did not take place was a timely move, most observers say. Itáwas matched by a cut in the rate it pays for borrowings from commercial lenders this week.