Special purpose firm to sell P500M in debt paper

An upstart special purpose corporation, supported by investment house First Metro Investment Corp., plans to sell up to P500 million in asset-backed commercial papers (ABCP) to selected institutional investors.

The ABCP was given a rating of “PRS 1” by local credit watcher Philippine Rating Services Corp. This suggests that the issuer has “the strongest capability for timely payment of the debt instrument issue on both interest and principal.”

First Sovereign, the new special purpose corporation, was created for the purpose of purchasing and securitizing government securities and issuing ABCPs. The debt paper, which will be offered to less than 19 investors, will be used to finance the purchase of government securities.

This type of transaction is seen providing short-term investors with an opportunity to invest in Philippine government securities, via their participation in the ABCP.

Philrating said its credit rating considered the following factors: minimal exposure to credit risk given government securities as the underlying assets; the unconditional and irrevocable guarantee by a strong and reputable firm, FMIC; having a highly rated global bank, HSBC, as custodian, and the higher interest rates on the ABCP offered by SPC.

The underlying assets that will back the issuance of commercial papers will be government securities such as Fixed-Rate Treasury Notes and Retail Treasury Bonds. These are backed by the full taxing power of the sovereign, and are therefore exposed to minimal credit risk, the rating firm said.

PhilRatings cautioned, however, that the owner of the SPC was a newly formed corporation with no historical operational and financial performance for the credit rating agency to consider. Although the underlying assets are government securities, a concern may arise on the ability of the SPC to remit payments made by the government to the investors on time, the rating firm said.

“This concern is mitigated by the unconditional and irrevocable guarantee of the full and punctual payment of any amount due under any ABCP by FMIC,” Philratings said.

“FMIC’s guarantee adds value to the securitization transaction since the government securities, in this particular case, are not collaterals in the usual sense. It is the SPC and not the government which has the direct obligation to the investors. The guarantee reinforces the assurance to the investors that they will be paid even if the SPC may fail to remit the payments made by the government on the securities,” it explained.

FMIC is also seen providing a liquidity facility, addressing the timing mismatch between the cash flows from the underlying assets and the funds needed to make payments on the maturing ABCP.

“PhilRatings gives a heavy weight to having FMIC as guarantor for the proposed transaction,” it said, noting that FMIC was the largest capitalized investment house in the country, with capital funds of P9.92 billion and total assets of P63.97 billion as of end 2010. It is the only publicly listed investment house among 44 member institutions of the Investment House Association of the Philippines.

FMIC is the investment banking arm of Metropolitan Bank and Trust Co., one of the largest and leading banks in the Philippines.

“The transaction may attract more investors as the interest rates on the ABCP will be higher than the interest rates on short-term securities offered by other financial institutions. The SPC will offer the ABCP to institutional investors and will market and sell such securities in coordination with the sales team and traders of FMIC,” the rating firm said.