The Government of the
BangkoRepublic
Sentral
ng Pilipinas
of the Philippines
Experience of the
Philippines in Securitization
Zeno Ronald R. Abenoja
Department of Economic Research
MoF-APFDC-WB Workshop on
The Rise of Securitization in East Asia
7-9 Nov 2005
Shanghai, China
The Government of the
BangkoRepublic
Sentral
ng Pilipinas
of the Philippines
Local Currency Bond Market as Percent of GDP, 2004
Source: AsianBondsOnline
The Government of the
BangkoRepublic
Sentral
ng Pilipinas
of the Philippines
Capital Market Financing
100
Percent
75
50
25
0
1999
Initial Public Offerings (IPOs)
2000
2001
Loans granted
2002
2003
2004
New Government bond issuances
The Government of the
BangkoRepublic
Sentral
ng Pilipinas
of the Philippines
Outstanding Domestic Bonds
2500
In billion pesos
2000
1500
1000
500
0
1996
1997
Public
1998
1999
2000
2001
2002
Private
2003
2004
The Government of the
BangkoRepublic
Sentral
ng Pilipinas
of the Philippines
Secondary Market Liquidity for T-Bonds
3500
4.0
3000
3.5
3.0
In billion pesos
2500
2.5
2000
2.0
1500
1.5
1000
1.0
500
0.5
0
0.0
1997
1998
1999
2000
Volume of secondary market transactions-LHS
2001
2002
2003
2004
Turnover ratio-RHS
The Government of the
BangkoRepublic
Sentral
ng Pilipinas
of the Philippines
Holders of Government Securities, 2004
Others , 20%
Govt, 5%
Banks, 49%
CB, 6%
Private, 8%
TEI, 12%
Source: Bureau of the Treasury
The Government of the
BangkoRepublic
Sentral
ng Pilipinas
of the Philippines
Role 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
The Government of the
BangkoRepublic
Sentral
ng Pilipinas
of the Philippines
Legal and Regulatory Environment
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
The Government of the
BangkoRepublic
Sentral
ng Pilipinas
of the Philippines
Legal and Regulatory Environment
Special Purpose Vehicle (SPV) Act (2002)
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
The Government of the
BangkoRepublic
Sentral
ng Pilipinas
of the Philippines
Legal and Regulatory Environment
Special Purpose Vehicle (SPV) Act (2002)
Powers of SPV
Primary: to invest in or acquire NPAs of fin institutions
Secondary:
 Engage 3rd parties to manage, operate, collect and
dispose NPAs
 Rent, lease, hire, pledge, mortgage, transfer sell,
securitize, collect rents and profits concerning NPAs
The Government of the
BangkoRepublic
Sentral
ng Pilipinas
of the Philippines
Legal and Regulatory Environment
Special Purpose Vehicle (SPV) Act (2002)
Transfer Condition
True Sale
• no effective or indirect control
• bankruptcy remote
• transferee can freely dispose
• no recourse
The Government of the
BangkoRepublic
Sentral
ng Pilipinas
of the Philippines
Legal and Regulatory Environment
Special Purpose Vehicle (SPV) Act (2002)
Financial incentives: On transfer
Tax exemption on transfer from FI to SPAV to
third party
Documentary stamp tax (DST)
Capital gains tax
Value added tax (VAT)
Reduced transfer fees
Mortgage registration
Filing fees on foreclosure
Land registration fees
The Government of the
BangkoRepublic
Sentral
ng Pilipinas
of the Philippines
Legal and Regulatory Environment
Special Purpose Vehicle (SPV) Act (2002)
Financial incentives: On recapitalization
•5- year NOLCO
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
The Government of the
BangkoRepublic
Sentral
ng Pilipinas
of the Philippines
Legal and Regulatory Environment
Special Purpose Vehicle (SPV) Act (2002)
Eligibility for the incentives:
 Transferred within 2 years from IRR
 Disposed within 5 years from acquisition
The Government of the
BangkoRepublic
Sentral
ng Pilipinas
of the Philippines
Legal and Regulatory Environment
Securitization Act (2004)
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
The Government of the
BangkoRepublic
Sentral
ng Pilipinas
of the Philippines
Legal and Regulatory Environment
Securitization Act (2004)
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
The Government of the
BangkoRepublic
Sentral
ng Pilipinas
of the Philippines
Legal and Regulatory Environment
Securitization Act (2004)
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;

The Government of the
BangkoRepublic
Sentral
ng Pilipinas
of the Philippines
Legal and Regulatory Environment
Securitization Act (2004)
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;
The Government of the
BangkoRepublic
Sentral
ng Pilipinas
of the Philippines
Legal and Regulatory Environment
Securitization Act (2004)
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 housingrelated ABS.
The Government of the
BangkoRepublic
Sentral
ng Pilipinas
of the Philippines
Legal and Regulatory Environment
BSP Regulations on banks’ securitization activities
Overall 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
The Government of the
BangkoRepublic
Sentral
ng Pilipinas
of the Philippines
Legal and Regulatory Environment
BSP Regulations on banks’ securitization activities
Securitization 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
The Government of the
BangkoRepublic
Sentral
ng Pilipinas
of the Philippines
Legal and Regulatory Environment
BSP Regulations on banks’ securitization activities
Approval
 all securitization of receivables of banks and other financial
institutions are subject to the approval of the BSP
Investments 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 BSPrecognized credit rating agency.
The Government of the
BangkoRepublic
Sentral
ng Pilipinas
of the Philippines
Legal and Regulatory Environment
BSP Regulations on banks’ securitization activities
Disclosure 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;
The Government of the
BangkoRepublic
Sentral
ng Pilipinas
of the Philippines
Legal and Regulatory Environment
BSP Regulations on banks’ securitization activities
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
The Government of the
BangkoRepublic
Sentral
ng Pilipinas
of the Philippines
Legal and Regulatory Environment
BSP Regulations on banks’ securitization activities
Capital 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 BSPrecognized credit rating agencies.
Risk weight
20%
50%
100%
Deduction from
total of Tier 1
and Tier 2 capital
Moody’
s
Aaa to
Aa3
A1 to A3
Baa1 to
Baa3
Below
Baa3
Unrated
Standar
d and
Poor’s
AAA to
AAA+ to ABBB+ to
BBBBelow
BBB-
Fitch
IBCA
Phil
Ratings
AAA to
AAA+ to ABBB+ to
BBBBelow
BBB-
Aaa to
Aa
A
Baa
Below
Baa
The Government of the
BangkoRepublic
Sentral
ng Pilipinas
of the Philippines
Asset-Backed Securities
96100
P M i l l i on
97400
2000
1500
1000
500
0
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Securitization deals
The Government of the
BangkoRepublic
Sentral
ng Pilipinas
of the Philippines
1992, 1995 - Citibank issued mortgage backed securities
1996 - 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 Trust
1997 - Philippine Airlines securitized its US ticket receivables
2003 - the Metro Rail Transit Corporation (MRTC), completed
the largest securitization in the Philippines through the issuance
of receivable-backed notes to local institutional investors.
The Government of the
BangkoRepublic
Sentral
ng Pilipinas
of the Philippines
Mortgage Credit and Bank Loans
2,500
14.0
12.0
2,000
1,500
8.0
6.0
1,000
4.0
500
2.0
0
0.0
2000
Mortgage credit (REL)-LHS
2001
2002
Outstanding bank loans (TLP)-LHS
2003
REL/TLP-RHS
2004
REL/GDP-RHS
Percent
In billion pesos
10.0
The Government of the
BangkoRepublic
Sentral
ng Pilipinas
of the Philippines
Real Estate Lending by Purpose
100%
PhP204.8B
PhP182.9B
Dec-97
June-05
Percent
75%
50%
25%
0%
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
The Government of the
BangkoRepublic
Sentral
ng Pilipinas
of the Philippines
Impediments 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
The Government of the
BangkoRepublic
Sentral
ng Pilipinas
of the Philippines
Impediments 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
The Government of the
BangkoRepublic
Sentral
ng Pilipinas
of the Philippines
Some 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
The Government of the
BangkoRepublic
Sentral
ng Pilipinas
of the Philippines
Concluding 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
The Government of the
BangkoRepublic
Sentral
ng Pilipinas
of the Philippines
Thank you
www.bsp.gov.ph
zabenoja@bsp.gov.ph