RP to buy back $411-M Brady bonds

The Philippines will buy back $411 million of Brady bonds by June as part of its effort to reduce overseas debt, National Treasurer Omar Cruz said yesterday.

"We have taken the steps to redeem those bonds consistent with our debt-management strategy to shift our dependence from foreign financing to domestic borrowing," Cruz told reporters yesterday.

The Philippines sold $4.3 billion of the bonds from 1990 to 1992, part of the reorganization of developing-country debt orchestrated by then US Treasury Secretary Nicholas Brady.

Backed by US Treasury bills as collateral, the Brady bonds are a type of securities aimed at reducing debt held by less-developed countries.

The Philippines’ remaining Brady bonds, worth $774 million, will mature through 2017.

Buying back $411 million of those bonds will save the government $32 million in interest payments and result in the release of $256 million worth of collateral, Cruz said.

The government plans to reduce the overseas part of its debt to 40 percent by 2008 from 45 percent. It will also raise 73 percent of its funding needs at home by that time, up from an estimated 58 percent this year.

Issued in 1992, the Brady bonds are coupon bearing bonds with fixed, step or floating rate (or hybrid combination of each). They have 10-to 30-year maturity, semiannual interest payments and generally amortize.

The principal and certain interest of Brady bonds are collateralized by US Treasury zero coupon bonds and other high grade instruments which, according to Cruz, would be released into the country’s reserves should the government decide to retire them.

Cruz said exactly $410.96 million would be retired by June, equivalent to 53 percent of the outstanding Brady bonds amounting to $774.35 million.

"We have so far executed three bond exchanges to retire an estimated $1.58 billion out of the original issue size of $3.38 billion," Cruz said.

Once the retirement of the Brady bonds is completed, Cruz said the exercise would reduce the country’s external debt by $410 million and translate to significant net present savings of at least $32 million.

"It will also trigger the release of the collateral worth $256 million," he said.

According to Cruz, the Brady bonds have a call option, but the government’s Brady issues had different maturity dates. This would make them difficult to retire all at once.

Budget deficits from 1998 have made the Philippines Asia’s biggest seller of bonds overseas, with P3.89 trillion of debt.

President Arroyo aims to erase the deficits by 2008 to reduce borrowings and cut interest payments, which account for about a third of the government’s annual budget. That will free more funds to build roads, bridges and schools and spur economic growth.