LGU bonds now subject to credit rating

MANILA, Philippines — A credit rating system for local government units (LGUs) will be established to mainstream bond issuances as an additional funding source for local development projects, the Development Bank of the Philippines (DBP) announced yesterday.

The state-run bank said it is working with the Department of Finance (DOF), state regulators, and multilateral lending institutions to establish a rating organization for LGUs similar to credit rating agencies, which may be launched by 2022.

DBP president and CEO Emmanuel Herbosa said the proposed rating system would provide the bond market with credible risk indicators of individual LGU bonds, as well as information on outstanding bond issuances.

The rating system will boost confidence and improve the risk appetite of potential investors.

“DBP hopes to institute an LGU-rating organization, much like the credit rating agencies which rate the viability of investments relative to the likelihood of default,” said Herbosa.

“We expect a significant increase in development initiatives nationwide once the LGU bond market has gained firm footing as it accords a substitute mode of financing.”

Herbosa said DBP’s “extensive experience” in working with local governments would help advance the LGU bond market as a sustainable financing option for LGUs to bankroll key infrastructure and social development projects that are currently heavily dependent on internal revenue allotment.

Through the credit-rating system, LGUs will be able to diversify funding sources based on their needs, revenue-earning capacity, and financial maturity.

“DBP would establish a viable risk model that is flexible, pragmatic and forward-looking,” said Herbosa.

“Once all LGUs are rated effectively, DBP could easily align its marketing efforts and provide strategic support, especially to those who need financial assistance,” he said.

The bank said the operational mechanics of the proposed credit rating system are still being finalized.

Based on latest government data, there are around 81 provinces, 144 cities, 1,490 municipalities, and more than 42,000 barangays nationwide falling under the administrative supervision of the Executive branch through the Department of Interior and Local Government and the DOF.

Herbosa said in addition to the establishment of a credit rating system for LGUs, DBP is exploring other financing solutions to enable local communities to recover from the pandemic-induced recession.

“We shall continue to explore innovative and sustainable financing solutions so that communities can continue to recover and rebuild from the crippling effects of the public health crisis,” he said.

DBP, the sixth largest bank in the country in terms of assets, provides credit support to four strategic sectors of the economy: Infrastructure and logistics; micro, small and medium enterprises; environment; and social services and community development.

It has also been designated as the country’s infrastructure bank and is currently a major conduit of government financial support to industries recovering from the public health crisis.