NG to issue warrants for foreign currency bonds

The National Government will issue warrants to allow holders of foreign currency bonds to exchange them into peso-denominated bonds in case of a credit default.

Finance Undersecretary and National Treasurer Roberto Tan said the move, a first for the Philippines, is part of government efforts to manage its debts.

“This is really part of the Philippine government’s general liability management program. Even as our improving fiscal situation is reducing our issuance of bonds in foreign currency, we are interested in supporting Philippine bank demand for these instruments,” he said.

Tan said such demand keeps the Philippine yield curve low, which helps lower the cost of capital for the entire economy, especially long term borrowers.

He also said that proceeds from the sale of the warrants will count as revenues for the  government.

At the same time, however, Tan said it is unlikely for the government to be experiencing a credit default.

“This will give a feature that they are protected in case of an event but we do not see that happening,” Tan said.

In economic jargon, a warrant is a derivative security that gives the holder the right to purchase securities from the issuer at a specific price within a certain time frame. Warrants are often included in a new debt issue as a “sweetener” to entice investors.  Warrants are issued and guaranteed and that its lifetime is often measured in years.

In its announcement, the government said the exchange rate to be used will be the exchange rate prevailing at that time.

The warrants, which will be sold to investors via a Dutch auction in early 2008, will expire after a defined number of years.

The government hopes to contain the budget deficit at P63 billion this year and to totally wipe this out by the end of next year.