Philippines flags bond warranty to prevent sell-off

The sovereign hopes to avert a sell-off of government bonds by offering a warranty that replaces foreign-currency bonds with peso bonds.
The Philippine government is planning to offer warranties to its foreign-currency bondholders to counter a potential sell-off by investors as a result of the US credit crunch, according to a Reuters report posted yesterday.

The so-called ôpaired-warrantyö would replace the foreign-currency bond with a peso-denominated bond, in the case of default. The instrument differs from credit default swaps (CDS) which offer insurance to bondholders in the case of default, because it matches specific peso securities to holders of paired warrants, continues the report.

The Philippines, like most domestic markets in Asia with the exception of Korea, has been relatively isolated from the global subprime-related turmoil in the financial markets.

Despite a disappointing year with respect to revenue collection, substantial privatisation revenues will fill government accounts in the coming months and offset any revenue shortfall. As a result, fiscal performance is forecast to be better than the government deficit target of Ps63 billion.

Meanwhile in September, the Asia Development Bank upgraded the country's economic outlook and lowered its inflation forecast for 2007 and 2008, with the economy now expected to grow at 6.6% in 2007 and 6% in 2008, up from earlier forecasts of 5.4% and 5.7%. Inflation projections were revised downwards to 2.9% in 2007 and 3.5% in 2008, against earlier forecasts of 4.8% and 5.0% respectively.

According to ADB, the surge in economic growth is being driven by vigorous private consumption, higher government expenditure and a jump in net exports. Growth in personal consumption, which makes up more than three-quarters of GDP, has been fuelled by the rapid increase of remittances from overseas workers.

Philippines Long Distance Telecommunications (PLDT), for example, has seen strong cellular subscriber take-up and usage allowing the company's free cash flow to reach $800 million in the third quarter, with core earnings reaching Ps9 billion.

Substantial improvements in revenues, profitability, operating cash flows and indebtedness have all improved significantly, leading the company to seek the consent of its bondholders to modify the limitations on dividends and on restricted payments.

Allowing the company to continue its growth strategy with more flexibility, the consent solicitation concerned the companyÆs $250 million 11.375% bonds due 2012, the $175 million 10.5% notes due 2009, and its $300 million 8.35% bonds due in 2017. In return for loosening the covenant of its bonds, PLDT tightened its limitations on indebtedness covenants thereby reducing its debt capacity.

Requiring a majority over 50%, the transaction closed with consent percentages ranging between 80% and 95% for all three bonds. Launched simultaneously in Asia, Europe and the US, the consent solicitation, arranged by Deutsche Bank, increased PLDTÆs distribution capacity by $2 billion.
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