Debt Papers
Top-rated commercial papers are more likely to give investors good profits
By Tina Arceo-Dumlao

Filipino investors are generally averse to investment risks. They would rather keep their money in ordinary savings, time deposits, or worse, under their bed, than go for other investment alternatives.

Through sustained education programs and the extension of the retail network of banks and financial institutions, however, an increasing number of Philippine investors are now willing to try and invest in other alternatives.
Among these are the commercial papers (CPs) issued by the country’s top corporations. These are basically debt papers or IOUs issued by corporations that function much like treasury bills issued by the government where the interest rate and maturity periods are fixed.

The only difference is that the government guarantees the payment of treasury bills or bonds – making them risk-free – while corporations guarantee to pay their commercial papers upon maturity.

Treasury bills and commercial papers issued by corporations comprise the bulk of the fixed income capital market in the Philippines. Fixed income means that the rate of interest is set from the date of issuance of the debt paper upon final maturity or redemption of the debt.

The latest data from the Philippine Rating Services Corporation, one of the country’s top rating agencies and an affiliate of Standard and Poor’s, showed that Philippine corporations issued an outstanding P16.8 billion worth of credit rated short-term and long-term CPs as of 10 June this year.

Companies issue these debt papers to bankroll their working capital expenditures or for expansion programs.

These CPs are issued by companies such as Ayala Land, Asian Terminals Inc., Bases Conversion Development Authority, Benpres Holdings Corporation, First Philippine Holdings Corporation, Filinvest Land, Fort Bonifacio Development Corporation, International Container Terminal Corporation, PCI Leasing and Finance Corporation, Philippine Long Distance Telephone Corporation, Robinsons Land Corporation, and Rockwell Land Corporation.

Commercial Paper Rating
Because these CPs are issued by corporations, thus, are not as risk-free as government instruments, rating agencies are present to evaluate a company’s ability to eventually pay off its IOU at the agreed time, and at the agreed interest rate to the investors.

These rating agencies such as Philratings use a common rating system that provides the capital markets with a common language for credit risk evaluation, and is a means to compare several instruments or investments.

Real Estate developers such as Ayala Land issue commercial papers

Through simple symbols, ratings give the investors, regulators, and the general public relative assessments of credit quality of rated issues or institutions across different industries or security types.

Needless to say, companies given the highest credit ratings for their commercial papers are considered to have the best capability to pay off their debts.

Philratings, which has been doing investment-rating services for more than 15 years, said more than 350 commercial paper issues, both short and long-term, have been rated since 1985. Short-term CPs have ranged between P25 million and P2 billion, while long-term CPs arranged between P75 million and P6 billion.

Philratings uses two sets of rating symbols. The highest is PRS 1 (best grade), which indicates the strongest capability for timely payment of the debt instrument, both on the interest and the principal.

The ratings are usually based on a study by the rating agency analysts, who are assigned to discuss business and competitive strategies of the company, its operating practices, financial position, or other factors that could affect credit quality.

PRS 2 (better grade) indicates above average capability and PRS 3 (good grade). There are, however, also ratings like PRS 4,5,6 referring to potentially problematic issues.

Commercial papers given a rating of PRS Aaa by Philratings indicate smallest degree of investment risk. Interest payments are supposed to be protected because the company is expected to be strong enough to handle any changes in its business environment over the term of the debt.

PRS Baa issues indicate that the issue is neither highly protected nor poorly secured. Such issues lack outstanding investment characteristics and in fact have speculative characteristics as well.

The country’s mutual fund industry, which absorbs the public’s investments in commercial papers, typically concentrates their investments in top-rated commercial papers to protect the public.

The top ratings, however, still do not guarantee that the debt would truly be paid at the end of the period. There have been cases in the past where even top-rated companies were unable to pay off their debts, due to significant debt problems such as those that arose during the Asian currency crisis.

These incidents are relatively infrequent, however, and top ratings usually almost guarantee payment upon maturity of the debt.

Philratings evolved from Credit Information Bureau Inc., which started in 1982 through the joint efforts of the Bangko Sentral ng Pilipinas, Securities and Exchange Commission and Financial Executives Institute of the Philippines.

Philratings, being the pioneering credit rating agency, has assigned ratings to more than 350 commercial papers, both short-term or one-year CPs to long-term, since 1985.

CP issuers come from a cross section of Philippine industry, from manufacturing to broadcasting and from transportation to financing companies.