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Govít to launch bond warrants

By Doris Dumlao
Philippine Daily Inquirer
First Posted 04:05:00 02/09/2008

Filed Under: Government Debt, bonds and t-bills

MANILA, Philippines -- The government plans to issue within this month warrants that would allow holders of its foreign-currency bonds to convert to peso bonds in case of default.

Credit Suisse has been appointed as sole arranger for the warrants issue.

The protection scheme will make Philippine government bonds more attractive to investors, as paired warrants carry zero risk weighting for capital adequacy purposes, the same as peso-denominated Treasury bonds.

Inquirer sources said the fineprints of the pioneering instrument were noted by the central bank at the meeting of its policy-making Monetary Board on Thursday.

Under the scheme, holders of Philippine government cash bonds -- known in the financial sector as ROPs -- that will mature by 2017 can exchange their holdings for peso-denominated T-bonds due in 2018 in case of default.

The scheme targets Philippine banks which are facing stiff capital charges on their exposure in overseas bonds with the implementation of the Basel 2 capital adequacy framework. The government estimates that about 40 percent of the $20-billion outstanding ROP float can be a potential market for the warrants, the sources added.

?It will encourage Philippine banks to continue holding ROPs so it will protect the yield curve,? said one source privy to the scheme.

The government wants to maintain a low yield curve to bring down the cost of capital for the entire economy, especially for long-term borrowers such as infrastructure project proponents.

Under the plan, the government will issue more 10-year T-bonds to be paired with the ROP warrants, using the benchmark in last week?s auction of the 10-year T-bonds, the sources added. In effect, the warrants will also carry a 10-year tenor instead of eight as previously planned by the Department of Finance.

During a primary auction by the Bureau of the Treasury last week, the 10-year T-bonds fetched a coupon rate of 5.875 percent.

No limit will be set on the warrants to be issued but the government will award based on market demand, the sources added. This means more auctions can be scheduled in the future depending on market reception.

The central bank has agreed to treat the ROPs paired with the warrants with zero risk weights just like the peso-denominated T-bonds. As such, banks which are existing ROP holders can avoid capital charges even without unloading their holdings of these overseas bonds.

?The scheme also gives the government automatic debt relief in times of credit stress because if there?s a default on the ROPs due in 2012, for instance, these will be replaced by T-bonds maturing in 2015,? the source said.

The warrants will be converted into equivalent T-bonds at the peso-dollar exchange rate at the time of default. The holder of a $100 ROP warrant, for instance, in case of a default and assuming that the exchange rate is at P100 per dollar, will get P10,000 worth of T-bonds, the sources explained.

?From the point of view of the Philippine bank, there?s no loss,? a source said.

The ?paired warrant? is different from credit default swap (CDS), which also offers insurance-like protection to bondholders, as the CDS settles in cash while the ?paired warrant? gives peso T-bonds in exchange, in case of a debt default by the national government.

The BSP earlier gave the national government the flexibility to issue up to $6 billion worth of warrants and match them with new T-bond issuance of equivalent amount. With a report from Reuters; edited by INQUIRER.net



Copyright 2014 Philippine Daily Inquirer. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.


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