LGU guarantees near P1.75-B

The LGU Guarantee Corp. (LGUGC) is optimistic that it can guarantee loans up to P1.75 billion by end 2002. So far, it has covered loans and bonds amounting to P1.556 billion covering eight local government units, aside from several municipalities, cities and provinces.

LGUGC senior vice president Lydia N. Orial said that they are optimistic that bigger loans and bonds are in store next year.

"Prospects for 2003 are good and we are looking at another P1 billion," Orial said during a forum held at the Asian Development Bank (ADB) yesterday.

The LGUGC is a privately-run guarantee corporation. It guarantees direct lending with financial institutions or bond floats to raise funds strictly for LGUs.

An LGU can issue a bond for any amount it requires for as long as the debt servicing represents not more than 20 percent of its annual revenues.

Thus if an LGU needs funds for a project worth P100,000 and its annual revenue is P100,000 it automatically can only have an annual debt service of P20,000. Therefore, it should issue a bond with a five-year tenure.

The bond issuance has no ceiling but there is a ceiling to their debt service, that is their annual debt service should represent at most 20 percent of their total regular revenues.

"What we are doing is trying to help develop this market since the national government is burdened by huge fiscal deficit. There is little likelihood that the national government will issue a domestic or sovereign guarantee," Orial said.

LGU borrowings is limited to local sources since most of the amounts anyway can be carried by local financial sources like domestic commercial banks and investment houses.

In the case of LGU borrowings or bond issues, local banks or financial institutions will underwrite the bonds with a guarantee to buy all the bonds issued by the LGUs. It is the underwriter who will also try to sell the LGU bonds to institutional investors like insurance companies, or private investors including the residents or business establishments in the community where the funded project is to be implemented.

Bonds are issued in denominations of P1 million, P100,000, P10,000 and P1,000. The lower denominations are usually sold to public school teachers and local businesses so that the constituents have a stake in the project.

Interest in the bond float is based on the weighted average of the 182-day Treasury Bill (T-bill) plus a spread of 2.5 percentage points to make it more attractive.

The bond market in the Philippines is relatively new in the Philippines. After the passage of the Local Government Code of 1991, LGUs could already engage in borrowing and bond floats without national government intervention.

However, political intervention limited the market as well as lending sources although five LGUs were able to get five bond issues.

According to the LGUGC senior vice president, the private financial sector then was not prepared to join the LGU funding experience without sufficient credit enhancement or guarantees. "To the private sector, LGUs are high risk credits being highly political entities," Orial added.

Five years ago, the LGUGC was formed by the Bankers Association of the Philippines (BAP), and the Development Bank of the Philippines (DBP) for the purpose of filling up the funding gap of the LGUs.

Total expenditures of all provinces, cities and municipalities have grown from P22.8 billion in 1991 to P127.9 billion in 2000, for an annual growth rate of a little over 16 percent. – TPT