The prospects for securitization in the Philippines effectively died when the Asian Financial Crisis hit in 1997 - in fact, there have no cross-border offerings issued from the country since that year, when JPMorgan Securities put together a $75 million future flow deal backed by air-ticket receivables for Philippine Airlines.

The country's junk-rated sovereign ratings reflect the Philippine government's difficulties in bringing its fiscal deficit under control since 1997. By the end of last year, the deficit had reached $70 billion - around 79% of GDP.

Despite its best efforts, the Treasury has been unable to put a significant dent in that figure, and its ratings seem likely to stay below investment grade for the foreseeable future. Consequently, many ABS bankers have long claimed the chances were slim of structuring a transaction that would make economic sense to an issuer or appeal to international investors.

Since the financial crisis, there have been the occasional reports in local media of everything from gas revenues to gambling receipts being securitized. A 2002 proposal called for a $175 million securitization of equity rental payments received by the Metro Rail Transit Corp., making it so far as securing ratings and being launched.

But, lead manager HypoVereins-bank pulled the deal at the eleventh hour, citing documentation issues.' The word at the time was that the MRTC failed to produce evidence of the contract it had with the Department of Transportation and Communication to show how much and how regularly Metro Rail Transit received payment for constructing a railway line in Metro Manila. Without this documentation, there was no guarantee the issuer would be able to meet its obligations to investors.

It was a huge blow to HVB, which had spent 18 months working on the deal, as well as to the Philippine ABS market. Consequently, even when the government passed a securitization law in July 2003, ABS bankers in the region greeted it with little cheer.

The most persistent talk over the past eight years has surrounded around securitizing overseas worker remittances, a funding method that has proved particularly popular among Latin American countries. Certainly, the Philippines would seem an ideal target for such a deal. According to the central bank - Bangko Sentral ng Pilipinas - remittance receipts are expected to total $9 billion in 2005.

Currently, that money goes directly to the workers' families, but various interested parties feel that by securitizing the rights to future remittance payments, funds could be used for more productive purposes. Omar Cruz, the country's new treasurer, has been quoted in local newspapers as saying the government is looking at doing something because securitization offers the prospect of higher ratings and better terms in the international markets than a straight bond issue.

Under that idea, the Central Bank would likely coordinate pooling remittance receipts from commercial banks into a single SPV and issue deals from there. Alternatively, and this idea is supposed to be favored by foreign arrangers, the banks themselves could issue deals independently of the government.

If they do choose to go down that path, the banks have a formidable ally in the Asian Development Bank, which lists its main goal as reducing poverty in its member countries. The triple-A rated multilateral bank, which has its headquarters in Manila, affirmed last week that it sees remittance securitization as potentially beneficial to banks and the country. Asian Development Bank is prepared to offer a guaranty on transactions if certain conditions are adhered to.

"Securitization provides a private bank with the means of issuing rated debt in international capital markets on favorable terms to their own rating," said William Willms, principal investment officer at Asian Development Bank. "The challenges concern the quality of their historical financial statements and predicting their prospects for several years out. We are prepared to support banks that meet certain credit ratings by providing our triple-A guaranty for the senior segment of the debt issued. That would drive costs down and hopefully assist in placement.

"We have talked about the concept to a limited number of commercial banks and have been approached by several foreign banks active in structured finance about the subject," added Willms. "We are prepared to work with the private sector to raise capital in the international markets if the proceeds can be directed by the bank to productive ends such as job creation and productivity enhancement. Asian Development Bank believes this approach balances national interests and those of the individual banks."

Even ABS bankers who are typically skeptical about doing business in the Philippines said the Asian Development Bank's participation would pique their interest. "I would have to be sure that the economics made sense but, if they did, then why not? [Asian Development Bank] would definitely make it more attractive to offshore investors," remarked one head of Asian ABS at a European Bank.

There are, however, two main stumbling blocks. Firstly, most of the largest commercial banks already have ample liquidity and do not need the funds. Secondly, and perhaps more importantly, it is unclear who actually has the rights to future remittance payments. The government and central bank claim they belong to the nation' and that if any deal gets done, it will be have to be under the state-banner with proceeds going to the government. On the other hand, the banks - supported by Asian Development Bank - argue that, as processors of remittance payments, they are legally entitled to sell the future rights.

Willms admits the continuing debate makes it harder to proceed with potential deals. "In countries like Pakistan, where the government controls all foreign exchange, and the Philippines, where the Central Bank is seeking to control remittance securitization, neither [Asian Development Bank] nor the private sector can move very quickly. The banks themselves, however, are normally very interested," said Willms.

That may be so, but most observers feel the ownership issue needs to be resolved for there to be any chance of seeing a remittance-backed deal issued from the Philippines.

Copyright 2005 Thomson Media Inc. All Rights Reserved.

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