Experience of the Philippines in Securitization

1. 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

2. Local Currency Bond Market as Percent of GDP, 2004 Source: AsianBondsOnline

3. Capital Market Financing

4. Outstanding Domestic Bonds

5. Secondary Market Liquidity for T-Bonds

6. Holders of Government Securities, 2004 Source: Bureau of the Treasury

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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

17. 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;

18. 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;

19. 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 housing-related ABS.

20. 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

21. 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

22. 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 BSP-recognized credit rating agency. 

23. 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;

24. 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

25. 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 BSP-recognized credit rating agencies.

26. Asset-Backed Securities

27. Securitization deals • 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.

28. Mortgage Credit and Bank Loans

29. Real Estate Lending by Purpose

30. 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

31. 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

32. 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

33. 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

34. Thank you www.bsp.gov.ph zabenoja@bsp.gov.ph