MB okays P3-B ADB bond issue to finance NHMFC’s bad loans

The Monetary Board (MB) has approved the proposed peso-denominated bond issue of the Asian Development Bank (ADB) intended to raise up to P3 billion to finance the acquisition of the bad loans of the National Home Mortgage Finance Corp. (NHMFC).

The MB approved the issue last week where the ADB would issue five-year, zero coupon bonds in the local market – the first of such bonds to be issued by a multilateral agency.

BSP Deputy Governor Alberto V. Reyes said the proceeds of the issue would be used for on-lending to Balikatan Housing Corp., a special purpose vehicle that would buy non-performing loans from NHMFC.

The BSP said ADB was targeting the housing sector as the main beneficiary since it has a large multiplier effect particularly in terms of job generation.

Because the ADB was a multilateral funding agency with triple A rating, Reyes said the peso-denominated issue would be very attractive to local investors.

NHMFC has been trying to unload its bad loans since last year.

On the other hand, the BSP said ADB’s original plan to undertake a currency swap has not been ruled out entirely despite the disagreement between the ADB and government negotiators.

The Monetary Board approved the plan as early as 2003 where the Philippines would swap the peso equivalent of $200 million with the ADB which would then use the fund to lend to private borrowers.

The plan was for the ADB to lend the funds based on fairly liberal terms that fixed the interest rate for 12 years. Local borrowers could take advantage of this facility since the ADB already lends to private borrowers anyway.

However, the currency swap was not accepted by the DOF which wanted even more liberal terms in order for borrowers to take advantage of ADB’s high credit rating.

Finance officials said that if the ADB was not willing to pass on this benefit to local borrowers, it was not worth doing the currency swap since it would still be government borrowing.

The BSP, however, was in favor of the plan since it would beef up its GIR and the peso would be available to domestic borrowers who would then be insulated from the fluctuations of the foreign exchange rate since they are borrowing in peso.

The ADB had planned to use local banks as conduit for the loans so that instead of lending directly, local banks could retail the funds to smaller borrowers.

The ADB was originally eyeing the debt markets in selected Asian nations by selling local currency-denominated bonds and funneling the proceeds into the domestic industries by lending to corporate borrowers that would otherwise be rejected by commercial banks.

The program would work better than similar attempts in the past since the ADB planned to loan in local currency. This lowers the risk to borrowers who would otherwise have to bear the risks in currency fluctuations against the dollar.

The BSP said the facility would be perfect for infrastructure projects since these projects are necessary and critical but inherently risky since they are long-gestating projects.

As a results, no local banks are willing to even considering financing such project unless it carried some form of government guarantee on future earnings.

ADB said it formulated the new lending strategy to address the need of the private sector for financing that would protect them from currency fluctuations since the bank would be assuming all the risks.