5 lgucc - lydia orial

LGU Investment Guarantees, Municipal Bonds and Creditworthiness: Challenges and Opportunities

by

LYDIA N. ORIALPresident/CEO

LGU Guarantee Corporation

WHO WE ARE

2National Conference on ENR Financing

RATIONALE FOR ESTABLISHING LGUGC


25

11.08

0

5

10

15

20

25

Pesos (billion)

Potential Demand Supply

LGUs hesitant to borrow from the private financial market

PFIs do not have bank relationship with LGUs

NG resources insufficient1997 Data

WHAT WE DO


CREDIT GUARANTEE

RELATIONSHIP MANAGEMENT WITH

FINANCIAL INSTITUTIONS

CREDIT RATING

COLLABORATION WITH NATIONALGOVERNMENT

& DONOR AGENCIES

GUARANTEE PROGRAM

MANAGEMENT

GUARANTEE SYSTEM


Financial Institutions

• Pays loans / bond amortization

• Calls on guarantee upon default

AAADue Diligence / Credit Rating

• Provides loans, or• Underwrites bond issues

• Guarantees FIs against default• Pays FIs in case of default according to original schedule

40% co-guarantee

LGUs/WDs/ECs/RETP/s

LGUGC-CLOSED DEALS (as of August 2009)

Accounts(amounts in P million)

Bond Amount

Guarantee d Amount

Outstanding Guarantee

1. Urdaneta City P 25.00 P25.00 P 0.00

2. Province of Aklan 40.00 40.00 0.00

3. Puerto Princesa City 320.00 320.00 0.00

4. Caloocan City 620.00 620.00 0.00

5. Tagaytay City 220.00 220.00 0.00

6. Iloilo City 130.00 130.00 0.00

7. Municipality of Daraga, Albay 75.00 75.00 0.00

8. Municipality of Bayambang, Pangasinan 42.00 42.00 0.00

9. Province of Leyte 205.00 205.00 0.00

10. Municipality of San Juan, Metro Manila 390.00 390.00 0.00

11. Municipality of Carmona, Cavite 150.00 150.00 60.00

12. Pasay City, Metro Manila 500.00 500.00 275.00

13. Municipality of Imus, Cavite 47.00 47.00 18.80

12. Municipality of Baliwag, Bulacan 50.00 50.00 39.00

Total Bond Issuances P 2,814.00 P 2,814.00 P 392.80


LGUGC-CLOSED DEALS (as of August 2009)


Accounts(amounts in P million)

Loan Amount

Guarantee d Amount

Outstanding Guarantee

1. Agoo, La Union P110.00 P93.50 P93.50

2. Imus, Cavite 23.00 19.55 19.55

Total LGU Loan Releases P133.00 P113.05 P 113.05

1. Metro Iloilo WD P38.13 P32.41 P23.23

2. Calamba WD 40.00 34.00 24.08

3. Legazpi City WD 105.00 105.00 87.50

4. Silang WD 189.00 160.65 119.00

5. Laguna WD 99.49 84.56 78.30

6. City of San Fernando WD 226.00 192.10 192.10

7. Indang WD 15.00 12.75 12.75

8. Cabanatuan City WD 250.00 212.50 142.54

9. Mabalacat WD 135.00 114.75 34.00

10. Norzagaray WD 70.00 59.50 29.75

Total WD Loan Releases P1,167.62 P1,008.22 P743.25

TOTAL P4,114.62 P3,935.27 P1,249.10

National Conference on ENR Financing8

LGU INVESTMENTS: Challenges and Opportunities

CHALLENGES OPPORTUNITIES

Limited reach Anchored on PFI/FA network Partnered with key LGU financing

institutions: DOF-BLGF, DILG, BSP, donor agencies

Aggressive marketing stance of GFIs using ODA funds

Low interest rates and no other fees such as origination and commitment fees

50% risk weight on LGUGC guaranteed bonds

Increasing PFI appetite on LGU financing

Technical evaluation Technical assistance Bond pooling (lower class, small

amounts) Prompt payment guarantee fee

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MUNICIPALBONDS

“any interest-bearing or discounted government or corporate security that obligates the issuer to pay the bondholder a specified sum of money, usually at specific intervals, and to repay the principal amount of the loan at maturity.

Bondholders have an IOU from the issuer but no corporate ownership privileges, as stockholders do.”

WHAT IS A BOND

1. Ensures transparency in LGU project implementation

2. Allows LGU constituent involvement through bond purchase

3. Encourages ring-fencing of an LGU enterprise making it possible for the LGU to determine whether or not it is earning from the project

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ADVANTAGES OF BOND FLOTATION

National Conference on ENR Financing

12

ADVANTAGES OF BOND FLOTATION


LOANS BONDS

Reference Rate (1-month PDST-F as of 9/14/09) 3.9908%

Lending Rates (Actual)* 8.6325%

Add-on Rate 2.0000%

Trustee Fee 0.5000%

Guarantee Fee 1.0000%

Total Annual Fees 8.6325% 7.4908%

Commitment Fee 0.5000%

Handling Fee 0.7500%

Underwriting Fee 1.0000%

Total Up-front Fees 1.2500% 1.000%

Total Annual Fees 8.6325% 7.4908%

Total Up-front Fees (over 10 years) 0.1250% 0.1000%

TOTAL FEES 8.7575% 7.5908%

INTEREST RATE DIFFERENTIALLoans vs. Bonds

* Average lending rates of LBP (9.2150%) and DBP (8.0500) and PDST-F as of September 14, 2009

BOND ISSUANCE PROCESS AND TIMETABLE

Timetable (in months) 1st 2nd 3rd 4th 5th 6th

1. Project development, feasibility study preparation, and hiring of a financial advisor, BLGF and DAR/ DENR Certification

The bond issuance process shall not include this period but will commence

after the completion of this activity

2. Sanggunian ordinance approving the project

3. Selection and appointment of a Bond Issuance Team

4. Designing the features of the municipal bond

5. Securing the guarantee for the municipal bonds

6. Sanggunian ordinance approving final bond terms

7. Sanggunian Panlalawigan’s validation of the ordinance of the municipal bond issuance by a component city/municipality

8. BSP favorable opinion

9. Preparation of the Official Statement, Primer and bond documents

10. Municipal bond offering and issuance

11. Debt servicing and payment of the principal This period shall cover the date of issue up to the maturity date


PROJECT MONITORING BOARD

GUARANTORGUARANTOR(LGUGC)(LGUGC)

GUARANTORGUARANTOR(LGUGC)(LGUGC)

TRUSTEETRUSTEETRUSTEETRUSTEE UNDERWRITERUNDERWRITERUNDERWRITERUNDERWRITERTRUSTORTRUSTOR(LGU)(LGU)

TRUSTORTRUSTOR(LGU)(LGU)

Monitors project status (Works Engineer to be hired) Monitors financial status Identifies potential problems, recommends remedies,

and monitors compliance


MUNICIPAL BONDS: Challenges and Opportunities


Aggressive marketing stance of GFIs for LGU loans with longer tenors at fixed rates

NGA issuance of pertinent permits

Agri -Agra Alternative Compliance

50% risk weight on LGUGC guaranteed bonds

Eligibility of LGUGC-guaranteed bonds as reserves for insurance companies

Ability of PFIs to extend loan/bond tenor

Competitive rates; variable with one-time option to fix

Fast processing

Market liquidity; increase in bond investors

Community investment participation

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CREDITWORTHINESS

A creditor’s measure of an individual’s or company’s ability to meet debt obligations

WHAT IS CREDITWORTHINESS

CREDIT RATING


LGUGC’s internal LGU credit rating system aims to promote LGUs as viable borrowers for private financial institutions and issuers of debt instruments, to facilitate their access to capital markets through a structured information base on their overall creditworthiness

Factors considered:• Political Risks• Economic Risks• Operating and Management Risks• Financial Risks

CREDIT RATING


Tendency for Efficient Debt Repayment

Development Capacity and Socio-Economic Endowment

Operating Performance

Financial Condition

ManagementShort-term Indicators

Long-termIndicators

CREDITRATING

CREDITSCREENING

CREDIT SCREENING AND RATING METHODOLOGY

Credit Screening Credit Rating

Risk of Unilateral

Restriction of Debt

Payments

1

2

Development Risk

Economic & Political Endowment Risk

D

C

B

A

TENDENCY FOR DEBT

PAYMENT

DEVELOPMENT AND ENDOWMENT

Operating

Financial

1.D

1.C

1.B

1.A

2.D

2.C

2.B

2.AManagement

A

Aa

Aaa

D

C

Ba

OPERATING & FINANCIAL

CONDITION RISK

MANAGEMENT

Aaa - highest credit standing

Aa - high credit standing

A - good credit standing

Ba - average credit standing

B - below-average credit standing

C - poor credit standing

CREDIT RATINGS

RATED LGUs

LGU Rating LGU Rating LGU Rating

1. San Juan, MM Aa 16. Alfonso Lista, Ifugao Ba 31. Puerto Princesa City Ba

2. Agoo, La Union A 17. Antipolo City Ba 32. Rosario, La Union Ba

3. Aklan A 18. Bayambang, Pangasinan Ba 33. San Fernando City, Pampanga Ba

4. Baguio City A 19. Binangonan, Rizal Ba 34. Santiago City, Isabela Ba

5. Baliwag, Bulacan A 20. Butuan City Ba 35. Surigao City Ba

6. Carmona, Cavite A 21. Calasiao, Pangasinan Ba 36. Urdaneta City Ba

7. Cagayan A 22. Caloocan City Ba 37. Aliaga, Nueva Ecija B

8. Imus, Cavite A 23. Daraga, Albay Ba 38. Calbayog City, Samar B

9. Lucena City A 24. Iloilo City Ba 39. Palayan City, Nueva Ecija B

10. Mariveles, Bataan A 25. Iriga City Ba 40. San Vicente, Palawan B

11. Tabaco City, Albay A 26. Kawit, Cavite Ba

12. Tagaytay City A 27. Leyte Ba

13. Taguig City A 28. Masbate City Ba

14. Taytay, Rizal A 29. Orani, Bataan Ba

15. Zamboanga del Norte A 30. Pasay City Ba

LGU DEBT MARKET (as of March 2009)

FIApproved Amount*

% Share

Availment/Disbursed*

DefaultRate

A. GFIs

DBP 17,507 16% 12,610 < 1%

LBP 74,157 68% 60,508 < 1 %

Sub-total 91,664 85% 73,118

B. PFIs

LGUGC 2,947 3% 2,926 0

PNB 9,926 9% 8,242 0.04 %

PVB 1,411 1% 1,238 0

Others 2,334 2% 2,334

Sub-total 16,618 15% 14,740

TOTAL 108,282 100% 87,857

* in Million Pesos



CREDITWORTHINESS: Challenges and Opportunities


Lacked of published LGU credit rating system

High rating cost LGU compliance with data

requirements

Project completion

Political risk perception

LGUGC’s internal LGU Credit Screening and Rating System

Project monitoring board, works engineer and trust fund

Increasing LGU debt market portfolio with almost zero default


ENR FINANCING


Unconventional LGU projects

Substantial funding requirement

Feasibility study preparation

Political will / dynamism of local officials

Technical assistance

Adopt DOF Policy Framework for LGU Financing

Availability of affordable financing modes from both the public and private sectors (with project preparation component)

Emerging dynamic local chief executives Showcase successful projects

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Thank You

LGU Guarantee CorporationTel. No.: (02) 751-8764 to 68Fax No.: (02) 888-4217Email: [email protected]: www.lgugc.com

5 lgucc - lydia orial

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