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PEACe Bonds: Rent-seeking or not?


Is it a case of rent-seeking or not?

That is the focus of the debate over the Poverty Eradication and Alleviation Certificates—the so-called PEACe bonds—issued by the national government to the public a decade ago, through a private bank which, in turn, acted as an agent of the Caucus of Development NGO Networks, or Code-NGO.

In 2001, a few months after President Gloria Macapagal-Arroyo rose to power, Code-NGO—a nonprofit organization oriented toward poverty alleviation activities—decided to augment its dwindling financial resources through what it called an “innovative” funding mechanism.

Under the scheme, the group’s banker, Rizal Commercial Banking Corp., would buy some P10 billion worth of specially issued 10-year, zero-coupon bonds from the Bureau of the Treasury (BTr) and resell these same securities to the investing public.

Eventually, the difference between the price at which RCBC bought these securities from the BTr and the price at which it sold them to investors on the secondary market (less RCBC’s fees) would be the profit that would be turned over to Code-NGO.

This profit—a little over P1.4 billion—would form the endowment fund from which the group would get its financial resources for its poverty alleviation projects.

The deal was executed successfully a decade ago this month, and the bonds are set to mature Tuesday, with the government set to repay the bonds’ ultimate buyers—the end investors—a total of P35 billion.

The total value of retiring the matured bonds reached this amount—from only P10 billion when it was issued—because of its specific feature as a zero-coupon bond.

A marketable security of this variety earns a fixed interest rate (12.75 percent compounded annually) but, unlike regular bonds, does not make regular interest payments to its buyers. Instead, all the earnings are paid in one lump sum when the security matures.

Mathematically, the total value of the interest payments would be the same—using the “time value of money” principle—whether the securities were structured as a zero-coupon (preferred by creditors who want to save all payments until the bonds’ maturity) or a regular bond.

However, critics of the deal—specifically the Freedom from Debt Coalition—accuse Code-NGO of engaging in a “rent-seeking” activity, in that the organization leveraged its connections with the government at that time, and used the resources of the state (in this case, the regular bond auction of the BTr) to earn money without providing a commensurate value to the transaction.

Specifically, the former chairperson of Code-NGO, Marissa Camacho, is a sister of Jose Isidro Camacho, who was appointed Finance Secretary (to whom the BTr reports) three months after the PEACe Bonds concept was launched. Another former Code-NGO chairperson, Corazon “Dinky” Soliman, also joined government in early 2001 as Social Welfare Secretary.

Code-NGO, on the other hand, contends that the PEACe Bonds were a purely commercial transaction, since it bought the bonds (for eventual reselling) from the government using private funds. The government, on the other hand, actually saved money since it was able to borrow at 12.75 percent when the prevailing interest rate at that time stood at over 16 percent for bonds of the same tenor.

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Tags: Bonds and t-bills , Code-NGO , Government , PEACe bonds , Philippines

  • http://twitter.com/davidcarlgrimes David Carl Grimes

    The PEACe Bonds was definitely a form of rent-seeking.  First of all, it was the worst 10 year Treasury Bond Auction on record from 1998 to 2011.  The yield-to-maturity (YTM) bid differential (from top winning bid to bottom losing bid) of 5.752% for the PEACe Bond auction was ten times the historic differential of 0.422% in YTMs for the 10 year Treasury Bond from 1998 to 2001.  So what should have been a failed auction because of such widely disparate bids still pushed through.  The wide differences in bids throughout the auction resulted in widely disparate values assigned by the bidders to the bonds.  The bond values of the top winning bid was as much as 71% higher than the bond values of the bottom losing bid.  This indicates that the bidders didn’t know exactly how to value the bonds or the other bidders colluded to give the auction to RCBC. Second, RCBC (the GSED) purchased the bonds for CODE-NGO at a YTM of 12.75% then RCBC Capital purchased the bonds from CODE-NGO at a YTM of 11%, allowing CODE-NGO to make gross profits of PHP 1.827 billion with no money down.  Third, RCBC sold down 10% of the bonds to institutional investors at YTMs ranging from 8.17% to 9.37%, allowing RCBC to lock in gross trading profits of PHP 201.32 million to PHP 374.94 million, in addition to their underwriting commission of PHP 240 million.  This transaction also established that institutional investors were willing to buy the bonds at much lower YTMs than the 12.75% YTM that Treasury received or the 11% YTM that RCBC Capital received on the PEACe Bonds.  RCBC’s potential gross profits could be as much as PHP 3.749 billion or double CODE-NGOs.  In other words, had the Bureau of Treasury been able to sell the PEACe Bonds directly to the ultimate buyers, institutional investors, it could have gotten an additional PHP 5.75 billion in Treasury Bond proceeds.

    For a more detailed analysis of the PEACe Bonds transaction, visit:


  • Anonymous

    Dinky Soliman has since moved on from “rent-seeking” to vote buying, via her CCT dole-outs.

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