RP raises $24.2M from debt warrants

The Philippines has raised $24.187 million from the issuance of debt-exchange warrants  covering $2.25 billion of its foreign currency bonds, higher than its earlier indicated ceiling of $1.75 billion, the government said yesterday.

The Philippines received $2.9 billion in bids for the warrants issue, which give investors protection from default. Each warrant was sold at $10.75, above the minimum indicative price of $10.50, the government said.

The instrument is aimed at making Philippine sovereign bonds more attractive to investors, especially banks, as paired warrants carry zero risk weighting for capital adequacy purposes, the same as peso-denominated T-bonds.

“More than 90 percent of the warrants were allocated onshore, with the rest going to offshore participants,” the government said.

The warrants’ zero-risk weighting makes the instrument appealing to local banks, which hold about 40 percent of outstanding Philippine sovereign bonds, according to government and investment banks’ estimates.

The series B-1 warrants sold by the government allow holders of Philippine sovereign bonds maturing on or after Nov. 15, 2017 and prior to Sept. 20, 2032, the option to exchange their exposure into peso-denominated Treasury bonds maturing in 2032, in case of a default.

The government said last week it does not expect to issue the same series B-1 warrants for at least two years.

The paired-warrant is different from credit default swaps (CDS), which also offer insurance-like protection to bond holders, because the CDS are settled in cash while the warrant converts the sovereign bonds into peso T-bonds.

The expected settlement day for the warrants is June 6.

The paired warrants provide protection to holders of foreign currency denominated ROPs (Philippine bonds) by giving them the option to replace their holdings with long term peso denominated Philippine government bonds, Finance Undersecretary Roberto Tan earlier said.

He also said that domestic owners of Philippine bonds are entitled to exemption from the central bank’s imposed capital provisioning required in pursuance of Basle II conventions or global banking standards set in Basle, Switzerland.

The Basle II rules require banks to match their holdings of risky investments such as sovereign bonds that carry 100 percent risk weighting with the required capital.

Last February, the government issued two million warrants at $7.50 each.

Paired warrants may be exercised in the event of a default of its international bonds.

Furthermore, paired warrants will allow holders of Philippine foreign currency bonds to exchange their peso-denominated bonds in case of a credit default.

Officials said the issuance of warrants would alleviate pressure on Philippine banks to look for products that may be risky for them and for investors.