In the first securitization out of the Philippines since 1997, Cayman Islands special purpose vehicle MRT III has launched $175 million in bonds backed by equity rental payments paid by the Philippine government Department of Transportation and Communication (DOTC), to the Metro Rail Transit Corp. (MRTC).

The equity rental payment is money owed by the government to MRTC, the company that built the Metro Rail Transit, specifically for building Phase I of the Metro Rail Transit, a light railway that serves Manila, the Philippine capital.

Hypovereinsbank is arranging and lead managing the deal, and Allen & Over is acting as legal adviser to the arranger. Local law firm SyCip is advising the issuer. MRT III is expected to close in March.

MTRC will use the funds to undertake other construction projects, such as Phase II of the Metro Rail Transit. MRTC might undertake another securitization in connection with this project. "MRTC might issue again because they want the money to bid for the contracts for other lines," said the deal participant. "They are currently bidding for the contract to build other lines."

Securitizations have been used before in projects involving build, lease and transfer contracts, but are normally done as the work is in progress, and used in part to finance the ongoing project. In this case, the Metro Rail Transit Corp. is being done after the completion of the railway, which MRTC began building in the early 1990s and completed in July 2000. The build lease transfer agreement between the DOTC and MRTC contracts MTRC to build the project and lease it to the DOTC for 25 years, after which it passes to the DOTC.

The bonds are being sold to investors in a private placement, which has a 144A structure, with a rating from Fitch Ratings. "The deal is too small to be done as a public or a global issue," comments a deal participant. "And as it is, most securitizations are not massively liquid all those who buy these deals know that this is a reason why you get a premium on these deals."

Using securitization allows the deal to get a double-B-plus rating and isolate a number of risks in the deal. "Given the quality of the contract with DOTC, the deal lends itself fairly well to securitization," says the deal participant. "MRTC felt that using securitization was going to give them the best deal." Alternatives to securitization would include a bank loan or a secured loan.

Fitch rated MRT III BB,' equivalent to the long-term foreign currency rating of the Republic of the Philippines. The transaction is subject to the performance risk of the DOTC, which is subject to the performance risk of the Philippines. If the Philippines long-term foreign currency rating was to be downgraded, it would be likely that MRT III would also be downgraded.

And there is some positive news for the sovereign rating, as in February 2002 Moody's Investors Service changed its outlook on the its long-term foreign currency rating of Ba1 to stable from negative. The reasons for this include Moody's belief that the recently appointed government has placed the Philippines back on track towards fiscal soundness and sustainable growth, and is capable of reducing the budget deficit to the target level of 3.3% of GDP this year.

In the past, there have been few securitizations from the Philippines, the last deal reportedly being a $75 million securitization of air ticket receivables by Philippine Airlines in 1997.

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