The Government of the Republic of the Philippines Bangko Sentral ng Pilipinas Experience of the Philippines in Securitization Zeno Ronald R. Abenoja Department.

The Government of the Republic of the Philippines Bangko Sentral ng Pilipinas

Experience of the Experience of the Philippines in SecuritizationPhilippines in Securitization

Zeno Ronald R. AbenojaZeno Ronald R. Abenoja

Department of Economic ResearchDepartment of Economic Research

MoF-APFDC-WB Workshop on MoF-APFDC-WB Workshop on

The Rise of Securitization in East AsiaThe Rise of Securitization in East Asia

7-9 Nov 20057-9 Nov 2005

Shanghai, ChinaShanghai, China


Local Currency Bond Market as Percent of GDP, 2004

Source: AsianBondsOnline


Capital Market Financing

0

25

50

75

100

1999 2000 2001 2002 2003 2004

Pe

rce

nt

Initial Public Offerings (IPOs) Loans granted New Government bond issuances


0

500

1000

1500

2000

2500

1996 1997 1998 1999 2000 2001 2002 2003 2004

In b

illi

on

pe

so

s

Public Private

Outstanding Domestic Bonds


0

500

1000

1500

2000

2500

3000

3500

1997 1998 1999 2000 2001 2002 2003 2004

In b

illi

on

pe

so

s

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Volume of secondary market transactions-LHS Turnover ratio-RHS

Secondary Market Liquidity for T-Bonds


Banks, 49%

TEI, 12%

Private, 8%

CB, 6%

Govt, 5%

Others , 20%

Holders of Government Securities, 2004

Source: Bureau of the Treasury


Role of SecuritizationRole of Securitization

• Enrich menu of credit instruments• Incentive for banks to help develop

credit markets• Diversify risk• Helps to overcome initial problem of

size/quality by bundling many underlying assets


Legal and Regulatory EnvironmentLegal and Regulatory EnvironmentSpecial Purpose Vehicle (SPV) Act (2002)Special Purpose Vehicle (SPV) Act (2002)

Main purpose

Through the creation of SPVs or AMCs:

· help banks dispose of their non-performing assets (NPAs) and replenish their loan portfolios with fresh capital.

· encourage private sector investments in NPAs, eliminate existing barriers to the acquisition of NPAs, and improve the liquidity of the financial system



SPV

Stock corporation organized under Corporation Code

60% Filipino owned, if acquiring land Min authorized capital : P 500 M

min paid-up capital : P 31.25 M Must be formed within 18 months from IRR Selling financial institution may not invest Another SPAV may not invest


Legal and Regulatory EnvironmentLegal and Regulatory Environment

Powers of SPV Powers of SPV

Primary: to invest in or acquire NPAs of fin institutionsPrimary: to invest in or acquire NPAs of fin institutions

Secondary:Secondary: Engage 3rd parties to manage, operate, collect and Engage 3rd parties to manage, operate, collect and

dispose NPAsdispose NPAs Rent, lease, hire, pledge, mortgage, transfer sell, Rent, lease, hire, pledge, mortgage, transfer sell,

securitize, collect rents and profits concerning NPAssecuritize, collect rents and profits concerning NPAs

Special Purpose Vehicle (SPV) Act (2002)Special Purpose Vehicle (SPV) Act (2002)



True Sale• no effective or indirect control• bankruptcy remote• transferee can freely dispose• no recourse

Transfer ConditionTransfer Condition



Financial incentives: On transfer Financial incentives: On transfer

Tax exemption on transfer from FI to SPAV to third partyDocumentary stamp tax (DST)Capital gains taxValue added tax (VAT)

Reduced transfer feesMortgage registrationFiling fees on foreclosureLand registration fees



Financial incentives: On recapitalization Financial incentives: On recapitalization •5- year NOLCO

Financial incentives: On work-out Financial incentives: On work-out

Debtor exempt from income tax if extended financial assistance by SPAV

SPAV financial assistance to debtor exempt from credit-related taxes and fees



Eligibility for the incentives: Eligibility for the incentives:

Transferred within 2 years from IRR Disposed within 5 years from acquisition


Legal and Regulatory EnvironmentLegal and Regulatory EnvironmentSecuritization Act (2004)Securitization Act (2004)

Purpose: Purpose:

improve the legal standing of securitized issues; promote securitization to the development of the capital market; and to pursue the development of the secondary market for asset-backed securities and other related financial instruments



Powers of SPV: Powers of SPV:

Accept the sale or transfer of assets Issue and offer the ABS for sale to investors Create any indebtedness or encumberance to defray administrative or other necessary expenses as specified in the securitization plan



Elimination of friction costs: Elimination of friction costs:

exemption from VAT and DST of the sale or transfer of assets from the financial institutions (FIs) to the SPEs (Special Purpose Entities); exemption from the payment of capital gains tax (CGT) of transfer of assets by dation in payment (dacion en pago) by the obligor in favor of an SPE;



Elimination of friction costs: (con’t)Elimination of friction costs: (con’t)

exemption from VAT of the original issuance of asset-backed securities (ABS) and other securities related solely to securitization transactions; exemption from VAT and DST of all secondary trading and subsequent transfers of ABS, including all forms of credit enhancement in such instruments;



Elimination of friction costs: (con’t)Elimination of friction costs: (con’t) exemption of the SPE, which is not considered an FI, from the payment of gross receipts (GRT); exemption from VAT and DST on re-transfer of assets and collateral from the SPE to the Originator or Seller; and exemption from income tax on the yield of the investor from any low-cost or socialized housing-related ABS.


Legal and Regulatory EnvironmentLegal and Regulatory EnvironmentBSP Regulations on banks’ securitization activitiesBSP Regulations on banks’ securitization activities

Overall purposeOverall purpose to foster the development of a market for new financial products but at the same time ensure that banks hold sufficient capital commensurate to the risks inherent in these products to encourage banks to diversify their investment portfolio as a means to stabilize earnings, control maturity mismatches and minimize over concentration of exposures



Securitization structuresSecuritization structures Traditional Securitization - cash flow from an underlying pool of exposures is used to service at least two different stratified risk positions or tranches Synthetic Securitization - with at least two different stratified risk positions or tranches that reflect different credit risk, where credit risk of an underlying pool of exposures is transferred through the use of credit derivatives or guarantees



ApprovalApproval all securitization of receivables of banks and other financial institutions are subject to the approval of the BSP

Investments by banksInvestments by banks all U/KBs with expanded derivatives authority may invest in securities overlying any tranche of securitization structures. U/KBs without expanded derivatives authority may also invest but only in securities overlying tranches of securitization structures that are rated at least A, or its equivalent, by a BSP-recognized credit rating agency.



Disclosure to prospective investorsDisclosure to prospective investors

(a) the ABS do not represent deposits or liabilities of the originator, servicer or trustee;

(b) that they are not insured with the PDIC;

(c) the investor has an investment risk;

(d) the trustee does not guarantee capital value of the ABS;

(e) that only loans existing in the books of the originator may be the subject of securitization;



Disclosure to prospective investors (con’t)Disclosure to prospective investors (con’t)

(f) that credit enhancements in the form of standby letters of credit, surety bonds, guarantees are allowed to support the ABS; and

(g) only the Trust Department of a bank may act as trustee of a securitization scheme


Legal and Regulatory EnvironmentLegal and Regulatory EnvironmentBSP Regulations on banks’ securitization activitiesBSP Regulations on banks’ securitization activitiesCapital treatmentCapital treatment

Capital charge for investments in securitization structures held in the banking book shall be based on the latest rating given by any of the BSP-recognized credit rating agencies.

Risk weight Moody’

s

Standard and Poor’s

Fitch IBCA

Phil Ratings

20% Aaa to Aa3

AAA to AA-

AAA to AA-

Aaa to Aa

50% A1 to A3 A+ to A- A+ to A- A

100% Baa1 to Baa3

BBB+ to BBB-

BBB+ to BBB-

Baa

Below Baa3

Below BBB-

Below BBB-

Below Baa

Deduction from total of Tier 1 and Tier 2 capital Unrated


Asset-Backed Securities

0

500

1000

1500

2000

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

96100 97400P Million


Securitization dealsSecuritization deals1992, 1995 - Citibank issued mortgage backed securities1996 - BPI issued asset-backed securities without recourse secured by a pool of real estate mortgages 1997 - the Solid Bank issued without recourse, mortgage loans selected from its mortgage portfolio to Mortgage-Backed Security Trust1997 - Philippine Airlines securitized its US ticket receivables2003 - the Metro Rail Transit Corporation (MRTC), completed the largest securitization in the Philippines through the issuance of receivable-backed notes to local institutional investors.


Mortgage Credit and Bank Loans

0

500

1,000

1,500

2,000

2,500

2000 2001 2002 2003 2004

In b

illi

on

peso

s

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

Perc

en

t

Mortgage credit (REL)-LHS Outstanding bank loans (TLP)-LHS REL/TLP-RHS REL/GDP-RHS


0%

25%

50%

75%

100%

Dec-97 June-05

Perc

en

t

Acquisition of Residential Property Acquisition of Commercial Property Development of Subd. for Housing

Development of Industrial Park Development of Commercial Property Dev. of Recreational & Amusement Park

Development of Memorial Park Construction of Office Condominium Const. of Residential Condominium

Construction of Infrastructure Project Other Purpose

PhP204.8B PhP182.9B

Real Estate Lending by Purpose


Impediments in the ABS industryImpediments in the ABS industry Inadequate infrastructure

Burdensome legal infrastructure and procedures

particularly on foreclosures

Inadequate external credit rating capacity

Custodianship, clearing and settlement systems

Trading conventions for ABS


Impediments in the ABS industryImpediments in the ABS industry

Financial taxes, and high transactions cost Concerns about the quality and risks of asset-backed

securities as financial instruments Limited understanding of asset-backed securities (ABS)

as a fund-raising tool


Some capital market reform initiativesSome capital market reform initiatives PhilPaSS -- RTGS Fixed Income Exchange 3rd party custodianship Credit Information Bureau Encourage entry of more credit rating agencies Financial Sector Forum – BSP, SEC, IC, PDIC, Encourage new instruments – UITF, CDOs Legislative agenda -Corporate Reform Act, Revised Investment Company Act, Personal Equity and Retirement Act, Pre-need Code Act, Corporate Recover Act


Concluding remarksConcluding remarks A series of structural and legal reforms are continuously being pursued to create an enabling environment for securitization.

The Securitization Law is a key element of this reform process:

- as it provides the favorable regulatory framework; and

- is expected to bring local practices consistent with

international norms


Thank youThank youwww.bsp.gov.ph

[email protected]@bsp.gov.ph

The Government of the Republic of the Philippines Bangko Sentral ng Pilipinas Experience of the Philippines in Securitization Zeno Ronald R. Abenoja Department.

Documents

treasury slide

asianbondsonline slide

financial system slide

underlying assets slide

main purpose

npas rent

acquisition of npas

transfer tax exemption