Developing the local bond market

Last Tuesday at the Makati Shangri-La Hotel, the law firm of Latham & Watkins sponsored a conference on the Philippine bond market. The theme of the conference was “Gaining the Edge: How Leading Philippine Companies Are Using Bonds to Their Advantage.”

Our panel, composed of Ayala Land’s Toti Bengson, BDO’s Ed Francisco, BPI Capital’s Dennis Montecillo, ABS-CBN’s Ric Tan, Picazo Law’s Gabby Dee, and Latham & Watkin’s Helena Kim, tackled the issue: “What Is Happening to the Peso Bonds: A Report on the Development of the Domestic Bond Market.”

Our bond market has grown by leaps and bounds in recent years. As pointed out by my friend, Cesar “Jing” Crisol, president and chief executive officer of the PDS Group, on the corporate front alone, there are, as of February 2014, 24 issuers with 65 securities listed with the PDS Group with an outstanding amount of over P400 billion. Back in 2005, when listing and trading of corporate bonds started, there were only two issuers with securities worth P10 billion.

I was asked about my thoughts on the regulatory and legal developments. I pointed to several capital market-related laws which, incidentally, I helped put in place when I was president of the Philippine Stock Exchange.

Pera Law

The first law that can definitely help develop the local bond market is Republic Act No. 9505, otherwise known as the Personal Equity and Retirement Account Act of 2008, or Pera. Envisioned as the local version of 401K system of the United States, this law seeks to establish a voluntary retirement program for individuals. Individual and married couples may contribute P100,000 and P200,000 per year, respectively, to their personal retirement account. If the contributor is an overseas Filipino, the tax-eligible cap goes up to P200,000 per individual and P400,000 per couple.

The law aims to develop the local capital markets, which includes the bond market. It gives the following benefits to the contributor:

1. The contributor is entitled to claim income tax credit equivalent to 5 percent of his total Pera contributions for the year.

2. Income from Pera investment products (like government securities and exchange traded bonds) is tax-free.

3. No portion of the Pera assets (including investments and their income) may be assigned, alienated, pledged, encumbered, attached, garnished, seized or levied upon.

4. Pera assets shall not be subject to estate tax upon the death of the contributor.

Cisa Law

The second law is Republic Act No. 9510, otherwise known as the Credit Information System Act (Cisa). This law seeks to establish a comprehensive and centralized credit information for the collection and dissemination of fair and accurate information relevant to, or arising from, credit and credit-related activities.

Cisa addresses the need for reliable credit information concerning the credit standing and track record of borrowers as a means of protecting lenders and other investors.

Fria Law

Another law that will contribute to the development of the local bond market is Republic Act No. 10142, otherwise known as the Financial Rehabilitation and Insolvency Act of 2010 (Fria).

Not known to many, Fria contains several capital market-friendly provisions. For example, it gives the borrower (issuer) and its creditors (e.g., bondholders) more flexibility to restructure the former’s obligations in case of insolvency.

Aside from the traditional court-supervised rehabilitation, Fria authorizes pre-negotiated rehabilitation. Under this mode, if the issuer can secure the approval of its creditors holding at least two-thirds of its total liabilities, it can restructure its obligations at a much faster pace than through court-supervised rehabilitation. In this type of rehabilitation, the court has a maximum period of 120 days from the filing of the petition to approve the restructuring plan, failing which the plan is deemed approved. Thereafter, the terms and conditions in the restructuring plan are binding on all the creditors, including the non-participating or objecting creditors provided that more than 50 percent of each class of creditors (secured and unsecured) consent to the restructuring plan.

More than that, Fria allows out-of-court restructuring where the restructuring plan shall bind all the creditors if the debtor is able to secure 85-percent creditor approval, with 75 percent of unsecured creditors’ and 67 percent of secured creditors’ approval.

There are other provisions in Fria that are conducive to the development of the bond market, like absolute priority in favor of bondholders on trade-related assets of market participants (e.g. underwriters and brokers) and exemption of clearing and settlement of financial transactions through clearing agencies from the coverage of a stay order.

SEC issued Memorandum Circular No.14, s. 2006

In 2006, the Securities and Exchange Commission (SEC) issued rules governing OTC (over the counter) markets which included government securities. The circular provides that “no broker or dealer shall participate in an OTC market unless said broker or dealer is a member of a self-regulatory organization (SRO) that has been registered with the [SEC].”

In November 2007, the SEC expanded the SRO registration of the PDEX, which is our fixed income exchange, to cover the inter-professional market.

In January 2008, PDEx was granted an SRO status for the OTC market which resulted in the coverage of all government securities trading activities.

These regulations strengthened the PDEX as a trading venue for the debt market.  As data indubitably show, we can now truthfully say that we have a vibrant and growing fixed income market, which is now serving the good of the economy and the country.

(The author, formerly the president of the Philippine Stock Exchange, is now a senior partner of the Angara Abello Concepcion Regala & Cruz Law Offices (AccraLaw). The views expressed in this column are solely his and should in no way be attributed to AccraLaw. He may be contacted at [email protected].)