First Sovereign to issue P500-million asset-backed securities

MANILA, Philippines - Special purpose corporation (SPC) First Sovereign Asset-Backed Inc. is issuing up to P500 million in asset-backed commercial papers (ABCPs).

The ABCPs, which will be offered to less than 19 investors, will be used to finance the purchase of government securities. This type of transaction will provide short-term investors with an opportunity to invest in Philippine government securities, via their participation in SPC’s ABCPs.   

The proposed issuance was assigned by domestic credit watcher PhilRatings a rating of PRS1, which is defined as “strongest capability for timely payment of debt and instrument issue on both interest and principal.”

The rating took into account the following: minimal exposure to credit risk given government securities as the underlying assets; the unconditional and irrevocable guarantee by a strong and reputable firm, First Metro Investment Corporation (FMIC); having a highly-rated global bank, HSBC, as servicer and custodian; and the higher interest rates on the ABCP offered by the SPC.

The underlying assets that will back the issuance of commercial papers will be government securities such as fixed-rate treasury notes and retail treasury bonds. These are backed by the full taxing power of the sovereign, and are therefore, exposed to minimal credit risk.

PhilRatings noted, however, that the owner of the SPC is a newly formed corporation which has no historical operational and financial performance for the credit rating agency to consider. “Although the underlying assets are government securities, a concern may arise on the ability of the SPC to remit payments made by the government to the investors on time,” PhilRatings said.

According to PhilRAtings, it is the SPC and not the government which has the direct obligation to the investors. The guaranty reinforces the assurance to the investors that they will be paid even if the SPC may fail to remit the payments made by the government on the securities.

FMIC will also provide a liquidity facility, addressing the timing mismatch between the cashflows from the underlying assets and the funds needed to make payments on the maturing ABCP.

PhilRatings gives a heavy weight to having FMIC as guarantor for the proposed transaction. FMIC is the largest capitalized investment house in the country, with capital funds of P9.92 billion and total assets of P63.97 billion as of end-2010.

 “The transaction may attract more investors as the interest rates on the ABCP will be higher than the interest rates on short-term securities offered by other financial institutions. The SPC will offer the ABCP to institutional investors and will market and sell such securities in coordination with the sales team and traders of FMIC,” PhilRatings said.