Mid-year Economic Briefing

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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
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Local Currency Bond Market as Percent of GDP, 2004
Source AsianBondsOnline
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Capital Market Financing
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Outstanding Domestic Bonds
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Secondary Market Liquidity for T-Bonds
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Holders of Government Securities, 2004
Source Bureau of the Treasury
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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

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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
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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

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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

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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

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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
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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

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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

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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

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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

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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

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Legal and Regulatory Environment
Securitization Act (2004)
Elimination of friction costs (cont)

• 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

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Legal and Regulatory Environment
Securitization Act (2004)
Elimination of friction costs (cont)

• 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.

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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

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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

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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. 

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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
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Legal and Regulatory Environment
BSP Regulations on banks securitization
activities
Disclosure to prospective investors (cont)
(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
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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.
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Asset-Backed Securities
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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.

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Mortgage Credit and Bank Loans
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Real Estate Lending by Purpose
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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

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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

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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

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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

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  Thank you www.bsp.gov.ph zabenoja_at_bsp.gov.ph