Philippine Business Magazine: Volume 8 No. 3 - Capital Markets
First Bond
The Philippines launches the first ever privatization bond in Asia

Even during the worst of economic times, there is always room for the most innovative financial products that are so designed to attract the fancy of the few and most discriminating investors left in the market. The P8-billion worth of Philippine PROgress bonds launched in August 2000 by the Finance department were one of these innovative financial products.

What makes the PROgress bonds attractive is that they are government securities and are therefore risk-free. The five-year bonds have a fixed coupon or interest rate of 13.875% payable quarterly. The fixed interest is much higher than the prevailing time deposit rate on a minimum investment of P25,000, but lower than the potential earnings from investing the same money in the stock market.

Unique Feature
Another advantage is the unique “exchange” feature that allows bondholders to swap their bonds for shares in a government corporation that plans to offer shares to the public through an initial public offering, or for cash in a privatization trade sale. At least 20% of any privatization IPO and 10% in case of a sale will be reserved for PROgress bondholders. Should bondholders exercise their right to exchange their bonds with IPO or privatization shares, they will receive a 5% allocation of shares or cash equivalent in the privatization.

The government has already lined up several companies for privatization. These include the Philippine Postal Corporation, Philippine National Construction Corporation, Philippine Phosphate Fertilizer Corporation, IBC Channel 13, the remaining 30% stake in Philippine National Bank, and the 10% government equity in Manila Electric Co.

If investors decide not to avail of any of these options, they will receive the principal of the bonds at the end of five years and consequently, interest payments will be paid every quarter as long as the bonds are not exchanged.

Financial Intelligence Asia has cited the Philippine PROgress bonds as the Most Innovative Deal of the Year 2000 because of its features and for being the first privatization bond in Asia.

On the other hand, First Metro Investment Corporation — the investment arm of Metropolitan Bank and Trust Co. — believes the issue is exciting because it is a hybrid government securities instrument convertible to equity stakes on state assets that are up for privatization. “The innovative convertibility feature of these instruments makes it ideal for listing at the Philippine Stock Exchange as it is cross-linked to equities,” First Metro states.

Listing Soon
The bonds were supposed to be listed at the stock exchange in June this year but the listing has been moved back due to some technical problems. The government and the PSE are ironing out the kinks to pave the way for the listing of the bonds within the year or next year. Once it pushes through, PROgress bonds will be the second batch of fixed income securities to be traded at the PSE. The PSE earlier listed the small-denominated treasury bonds that are due to mature in 2004.

Named joint issue managers and lead underwriters were BNP Paribas, First Metro Investment Corporation, and Land Bank of the Philippines. Co-lead underwriters are BDO Capital, BPI Capital Corporation, PCI Capital, and RCBC Capital while the trust services department of the Development Bank of the Philippines was named the exchange agent.