February 20, 2008 : It is reported in the Business World that the Philippine Government is selling sweeteners for its foreign currency-denominated debts, at not less than $7.50 each, in a three-day auction that begins today.
The debt-exchange warrants, which will allow holders of foreign currency bonds to convert to peso bonds in the event of a default, will be sold via a Dutch auction that will end on Friday, with a floor price.
The warrants are aimed at making Philippine sovereign bonds more attractive to investors as paired warrants carry zero risk weighting for capital adequacy purposes, the same as peso-denominated T-bonds.
The government has estimated that holders of about 40% of the approximately $20 billion in outstanding sovereign bonds could be a potential market for the warrants.
The bond warrants will give holders of Philippine sovereign bonds maturing until 2017 the option, in case of a debt default, to exchange their exposure into peso-denominated Treasury bonds maturing in 2018.
The government has said it would use its 2018 peso bonds auctioned late last month with a coupon of 5.875% as exchange securities.
The paired warrant is different to credit default swaps (CDS), which also offer insurance-like protection to bondholders, as the CDS settles in cash while the "paired warrant" gives peso T-bonds in exchange.
Eligible for the warrants program are holders of dollar-denominated ROPs maturing this year until 2011 and those that fall due from 2013 to 2017. Euro-denominated sovereign debt papers due 2010 and 2016 also qualify.
Finance officials said developments in the debt market had been considered in deciding on the minimum bid price. The warrants were designed such that banks that opt to get them would be spared from risk charges levied since July last year for exposure to the offshore debt.
Basel 2 requires a stricter capital requirement for ROPs, such that banks should set aside 100% capital for these debt papers by 2009.
Banks were then caught in a sticky situation of choosing between assuming the risk charges on their ROP holdings or buying the warrants for a price to be spared from the stiffer capital charge.
Bigger banks or those well-capitalized, however, appear to be the ones most likely to benefit from the warrants, which will free up capital for other investment activities.
"At that price, it’s a reasonable level in comparison to the cost of capital-raising among local financial institutions," said a bank treasurer from a top-tiered local bank.
"The main advantage here is to take out the risk-weighting than pure credit risk protection," the banker added.
A bond dealer from a smaller bank, meanwhile, thought otherwise.
Buying the warrants would let banks free up capital for other investment but the trade off could be costly, he said.
"It’s equivalent to a 20 to 25 basis point reduction in returns or yields. If a bank is well-capitalized and they don’t need space for additional capital, they can hold on to ROPs and assume the capital charge," the dealer said.
"It depends really on the capitalization of the bank and the ROP position," he added. (reported by M. E. I. Calderon and Reuters)