MANILA, Philippines--State-run Home Guarantee Corp. will sell P5 billion worth of long-term bonds in the local capital market by the second quarter of next year to strengthen its capacity to cover loan defaults.

The need to strengthen its financial muscle follows the strong growth in housing loans. Rising demand for home loans, in turn, is partly a result of the move of the Pag-IBIG Fund to make housing loans more affordable for its members.

HGC, as stated under Republic Act No. 8763, provides guarantees to socialized and low-cost housing loans extended by financial institutions, such as the Pag-IBIG Fund, to credit applicants.

HGC president Gonzalo Bongolan said his office expected to increase its guarantee exposure to as much as P83.5 billion worth of home loans by next year, or about 16 percent higher than the P72 billion recorded as of end-2007.

He said the projected increase in guarantee cover was an indication of the steadily rising economic activity in the housing sector.

"The proceeds of the bond sale will all be used to strengthen our guarantee capacity," Bongolan told reporters.

HGC has about P20 billion in outstanding commercial obligations, but Bongolan said none of its liabilities would mature in the short term. Its commercial liabilities would start falling due by 2013, he said.

The last time HGC issued bonds was in 2006, when it raised P8.2 billion. The amount was also used to beef up its guarantee capacity. The bond offering in 2006 was oversubscribed as HGC was originally intending to raise only P7 billion.

Bongolan said HGC hoped that its bond offering next year would also be warmly received by the market.

HGC had to wait until the second quarter to sell bonds to allow market conditions to stabilize coming from a high-inflation environment. Inflation has been hitting double-digit levels this year due to high oil prices and rising demand for rice and other food products.

Inflation is often taken into account by bond investors because it eats up the yields from investments in fixed-income securities. The faster the inflation, the higher the interest rates they will seek from their investments in bonds.

"We want proper timing. Second quarter of 2009 might already be a good time to sell bonds," Bongolan said.

The Bangko Sentral ng Pilipinas, the Philippine central bank, earlier said inflation would remain at double-digit levels until the first quarter of 2009, but start to taper off by the second quarter.

HGC is also undertaking other revenue-raising mechanisms, including the sale of foreclosed assets. Bongolan said HGC has so far raised P700 million this year from the sale of acquired assets and expects to sell more before the year ends.