The Philippine government has recently been making positive noises about establishing a framework from which securitization could develop, but again, skepticism reigns among industry analysts in the region. They insist that although the mind may be willing, the country is still a long way off its aims.

But an economy in desperate need of funds, and a government looking at any means possible to secure this, should increase the possibility of an active asset-backed market developing, sources say.

Early in December, the Securities and Exchange Commission outlined preliminary rules on ABS issues, which included guidelines to the establishment of special purpose vehicles. More specific points stipulated that all asset-backed transactions must be registered with the SEC, the minimum amount to be issued, credit enhancement requirements and that the trustee must make regular reports to the SEC with regards to deal performance.

All of these will be important features of any ABS framework, yet the feeling remains that the details that have yet to be disclosed need to be required before a conducive legislation to ABS can be installed.

Some pertinent questions remain: For instance, where are the rules on whether a true sale of assets will be allowed?; What are the points of notifying obligors?; Will SPVs be subject to withholding tax?; Will the SPV be bankruptcy remote? - all important, and all that require significant due diligence. But these issues will have to be handled by other government agencies, which makes comprehensive legislation even more difficult.

Obstacles Still Exist

Bankers are understandably reserving their judgment on the latest news. "There has been a lot of talk about this for some time, seminars have been held, but nothing concrete has come out of it," said one banker. "I've been hoping to hear news for the last couple of years. Even if they are serious this time, we still have to see in terms of implementation because there's more than one regulatory body that's involved. Just from past experience, I would imagine that the decision making process is going to take some time."

Even if legislation is passed, and that is a big if, some doubt whether there would actually be the market for any deals. "Unless there are significant changes in the country, you have to ask what would be the investor appetite for ABS and MBS transactions," commented one respected local analyst. "The constant political crisis that seems to afflict the country which begs the question whether any deal could expect to pierce the sovereign ceiling from the ratings agencies. Additionally, there are the assets themselves. Corporates in the Philippines have terrible collection records on recovering debts, so there is no guarantee that transactions will perform sufficiently to repay investors.

"International institutional investors in particular want some kind of security in what they buy in this market - that's why the may favor asset-backed over the higher premiums they may get from other kinds of bonds," he continued. "Look at what has happened recently in Italy with the INPS government deal, and how that has underperformed because of poor collections. I don't think you can say the Philippines is as sophisticated as Italy, so there are going to be problems."

Attempts to get the market up and running have been sporadic at best. It is believed that the Bank of Tokyo-Mitsubishi was awarded two mandates to structure deals in the last couple of years, but these floundered as the regulators didn't come back with approval.

ABS Develops, Slowly but Surely

On a more positive note, the government has more recently been linked in a move to securitize its 27% stake in the brewers, San Miguel (ASRI 12/4/2000 p.11), and has also been making noises about forming a secondary mortgage institution with the purpose of issuing MBS deals. Again though, it should be stressed that the two state housing agencies - the National Home Mortgage Finance Corp. and the Home Development Mutual Fund (known as Pag-Ibig) - do not install confidence with their collection performance.

Pag-Ibig actually launched an MBS in 1998, a deal arranged by Citibank, but investors were skeptical as to the ability of the agency to collect debts, and consequently, interest in the bonds was below expectations.

Jerome Cheng, ratings analyst with Moody's Investors Service, explained that collection performance was one area of difficulty that would have to be improved significantly. "In addition to the legal and regulatory framework and the tax issues, the credit policies, the comprehensiveness and integrity of historical performance data, collection and servicing procedures are all of concern to us," he said. "If there is a real possibility of transactions taking place, we will have to look closely into those areas."

Cheng also reserved his judgement as to how serious the government and SEC actually are with their proposals. "So far, there has been no cross-border term securitization originated from the Philippines and some of the previous proposals we received didn't happen because of regulatory issues," he explained. "If the government and regulators really have the intention to open things up, that would definitely help to an extent, but how and when transactions do come out really depends on the pace that the government does things. At the moment, we don't know that."

Should the difficulties be overcome, and deals are readied, there is still the problem of getting ratings above the sovereign ceiling although Cheng says that can be overcome.

"In terms of piercing the sovereign ceiling, whether or not you can depends on some other factors on top of the domestic rating," he explained. "In order to pierce the sovereign ceiling in future flow transactions, besides the enhancement to mitigate the sovereign risks, the combination of the survivability of the sponsor and the sustainability of the receivables need to be of a higher credit quality than the foreign currency rating. You may not be able to find many entities in the Philippines that can actually meet this, but having said that, you may still be able to get there if you put in some external third party guarantee or monoline wrap."

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