RP to retire $126M of Brady bonds

The government said yesterday it will buy back $126 million in Brady bonds on May 1, the final payment on a 1992 debt restructuring program and a reflection of the government’s improved finances.

The Philippines will join Colombia, Brazil, Venezuela and Mexico as countries that have retired the costly bonds.

The Philippines, which relies on debt to fund its budget deficits, started to retire its remaining Brady bonds last year as government revenues improved following tax changes.

National Treasurer Omar Cruz said the pre-payment was part of the government’s debt management strategy focusing mainly on reducing external debt to reduce its debt servicing expenses.

This third and final tranche will free up about $82 million in collateral.

It also highlights the country’s improving finances as record foreign exchange inflows buoy its balance of payments surplus and tax reform and asset sales shrink the budget deficit.

"With this prepayment of the last series of Brady bonds, the Philippines will finally mark the close of its chapter on Brady bonds," the government said.

The bonds, named after former US Treasury Secretary Nicholas Brady, were originally issued by the Philippines in 1992 as part of a debt restructuring program.

Like South American countries — who were the main issuers of the dollar-denominated bonds — the Philippines was trying to grapple with its debt and draw a line under defaults in the 1980s.

The government said that buying back the final tranche, which have an expiry date of June 1, 2018, would generate estimated savings of $12.6 million.

The government spent $701 million last year in partially retiring its Brady bonds.

As its fiscal deficits shrink, the Philippines has reduced its appetite for overseas debt in favor of cheaper local borrowing, highlighted in the past year by programs to swap less liquid domestic debt with more liquid maturities.

According to the Bureau of Treasury (BTr), the government has already saved as much as $32 million when it retired 53 percent, or $410.96 million, of its outstanding Brady bonds in June last year.

The retirement also paved the way for the release of $256 million worth of collaterals in the form of zero-coupon US treasuries. The collateral was subsequently deposited into the country’s international reserves.

Issued in 1992, the Brady bonds are coupon bearing bonds with fixed, step or floating rate (or hybrid combination of each). They have 10 to 30 year maturity, semiannual interest payments and generally amortize.

The principal and certain interest of Brady bonds are collateralized by US. Treasury zero coupon bonds and other high grade instruments which would be released into the country’s reserves should the government decide to retire them.