The Bureau of the Treasury has been asked to consider the rollout of an innovative new financial instrument that will allow bondholders to trade coupon payments and principal repayments separately.
Investment house First Metro Investment Corp. recently pitched to the BTr the introduction to the Philippine market of strip bonds, which are bonds whose coupon payments and principal repayment are “stripped” and traded separately. The proposal is to allow stripping of bonds for benchmark bonds of longer tenors such as 10 or 15 years.
“The natural buyers are corporations with cash flow deployment strategy because they cannot buy 15- and 20-year bonds to match their cash flow,” FMIC president Roberto Juanchito Dispo told reporters.
The market for bond strips is growing globally, especially in advanced markets. Bond strips are seen as another tool to boost liquidity of fixed-income instruments.
In the Philippine context, Dispo said the biggest advantage of having this product would be to bridge the gap between tax-exempt institutions and those that were not exempted.
Right now, he said tax-exempt institutions like the Social Security System and Government Service Insurance System could not trade bonds because they could not pass on their tax privilege to taxed institutions.
“By introducing strips, with their GS (government securities) holdings, GSIS can sell the principal because their interest earnings are tax-exempt and those are preserved but the principal only can now be liquidated,” Dispo said.
For the government, Dispo said the advantage would be “introducing new products to the market and creating additional liquidity.”
It is also possible that the stripping of bonds may find a market among individual investors and not just institutions.
First Metro Asset Management Inc. president Gus Cosio added that in other markets, private bankers—or those serving the wealth management requirements of high-networth individuals—were the biggest buyers of strip bonds.
“In stripping, the coupon is smaller than principal so investors can trade those for capital gains,” Cosio said. “The advantage is that you can buy at smaller lots.”
Reynaldo Montalbo, FMIC senior vice president and head of treasury group, explained: “If I were the holder of existing GS worth P1 billion, I can chop it down to smaller pieces, let’s say sizes of P10 million, then I can sell all of that. If the maturity is eight years, you just discount it based on present value and then you sell like a zero-coupon bond.”
This means that one who has P100 million worth of bonds maturing in 10 years will sell today for less.