Gov’t pension funds may offer ‘strip bonds’ this year

MANILA, Philippines - The Government Service Insurance System (GSIS) and the Social Security System (SSS) may offer a new financial investment called “strip bonds” this year that will allow bond holders to trade coupon payments and principal repayments separately, the First Metro Investment Corp. said.

FMIC president Roberto Juanchito Dispo told reporters yesterday the Bureau of Treasury is now awaiting a tax ruling from the Bureau of Internal Revenue on the planned bond issuance.

“The BSP (Bangko Sentral ng Pilipinas) has formally requested the market for their comments on strip bonds and I think by now markets have submitted already their comments,” Dispo said on the sidelines of the Latham & Watkins Philippine Bond Seminar in Makati.

“The next step for that would be for the National Treasury to be able to get a final tax ruling from the BIR. It’s the last remaining step that needs to be completed then after that, we can already launch the strip bonds,” he said.

The FMIC late last year asked the BTr to consider the issuance of strip bonds, which are bonds whose coupon repayments and principal repayment are sold and traded separately.

The strip bonds were proposed to be offered through the auction system of the BTr.

Dispo said the BTr this quarter has worked with the central bank to get market sentiment on this product to start things rolling.

“This is intended for the pension funds, the SSS and the GSIS because they’re holding on to illiquid government securities that are non-tradable and are reserved only for tax-exempt institutions,” Dispo said.

“So by way of stripping, they’ll be able to sell the principal (repayment component) separately and generate liquidity out of it,” he continued.

SSS and GSIS may offer an initial P100 billion each during the launch of strip bonds, Dispo said.

FMIC, which has proposed to act as underwriter for the issuance, will choose a tenor based on the inventory of the two pension funds, he added.

Aside from strip bonds, the investment bank is also finalizing a peso-bond exchange program proposal for the BTr to lengthen maturity and reduce borrowing costs.

“If you would look at the supply of government securities in the market, there are benchmarks that are very weak, meaning the volumes have either matured or there’s very illiquid trading for those particular tenors,” Dispo said, as the market seems to be in need of “fresh” 20, 25, 10, and five-year tenors.