LTO-IT asset-backed bonds get PRS Aa plus credit rating

The Philippine Rating Services Corporation (PhilRatings), the pioneer domestic credit rating agency, has upgraded the rating of the P1.6 billion SPT LTO-IT Asset-Backed Bonds from PRS Aa to PRS Aa plus. The firm said a rating of "PRS Aa plus" means the margins of protection may not be as large as in issues that are rated as PRS Aaa. Fluctuations of protective elements may be of greater amplitude or there may be other elements present which make the long-term risks appear somewhat larger than for PRS Aaa-rated securities. The plus (+) sign further qualifies the rating to indicate the issue’s relative higher position in the rating category", PhilRatings said.

The rating of PRS Aa plus assigned to the LTO-IT asset-backed bond issuance reflects the following key strengths: (1) irrevocable payment instruction to the Land Bank of the Philippines to remit to the SPT from the LTO computer fees escrow account P50 million monthly, which is more than sufficient to cover principal and interest payments when these become due; (2) improved ability of the LTO-IT project to generate revenues, together with the availability of the reserve fund, to sustain the timely monthly remittances of P50 million to the SPT; (3) greater assurance on the sufficiency of the funds to cover currently projected operating expenses, long outstanding payables, capital expenditures until the maturity of the bonds; (4) sound legal structure that protects the SPT revenue cash flows from any possible solvency problem of the originator; and, (5) stable financial organizations handling the financial management support of the structure. These strengths are counterbalanced by the concerns in the operations of Stradcom, particularly the possibility of a change in management control in the parent company by end of the year; the occasional systems downtime, which shall eventually be addressed by its systems upgrading program funded by the allocated proceeds from the securitization transaction, and the need to hook up all the LTO offices to the LTO-IT system.

Under an irrevocable payment instruction, P50 million monthly remittances from the LTO-IT revenue escrow account to the SPT shall be satisfied first before any amount in the revenue collections per month can be transferred from the LTO-IT Escrow Account with Land Bank to Stradcom’s bank account. The monthly remittances of P50 million to the SPT have been calculated to be more than sufficient to cover the repayments of the principal and interest to the bondholders, as well as the periodic fees of the other transaction parties, when these become due.

Furthermore, it was reported that “during the first half of 2007, Stradcom Corp. has already been generating around P127 million monthly revenues, a 42% increase from the P89 million average monthly revenues in the same period last year. The computer fees increase in August 2006 and the volume growth in the core revenues, as well as the kick-off of the connectivity revenues, contributed to the much improved revenue generation of the company. With the improving revenue generation performance and with the establishment of the P150 million reserve fund at the onset of the securitization transaction, the P50 million monthly remittances to the SPT are seen to be sustainable throughout the term of the bond.

(Mr. Ed F. Limtingco can be reached at 0917-7220521 or at [email protected])