PDEx says project bonds to help fund Philippine infrastructure needs

THE BOND MARKET is moving forward with the opening of an alternative funding avenue for special purpose vehicles or entities (SPVs/SPEs) undertaking infrastructure projects to support the government’s infrastructure thrust.

The Philippine Dealing and Exchange Corp. (PDEx) on Wednesday gathered regulators, investment banks and other stakeholders in Makati City to discuss the feasibility of issuing project bonds.

“The financing requirements for our national infrastructure are challenges thrown to the local capital market, to prove itself capable to fulfill the role as a rich and practical alternative funding resource,” PDEx Chairman and Chief Executive Officer Cesar B. Crisol told the forum.

For 2017 alone, the government allocated a record P860.7 billion, equivalent to 5.4% of gross domestic product, for public infrastructure developments.

The forum considered how SPVs/SPEs can issue bonds on a limited recourse basis, taking the financing structure agreed upon by AP Renewables, Inc. and Bank of the Philippine Islands (BPI) for the Tiwi and MakBan geothermal power facilities as a case study.

AP Renewables obtained nonrecourse project finance from Bank of the Philippine Islands (BPI) by issuing a project bond amounting to P10.7 billion to partially redeem its preferred shares as well as fund its operating expenditure and future rehabilitation requirements.

The Asian Development Bank (ADB) guaranteed 75% of the debt securities issued by the unit of Aboitiz Power Corp. and considered this as the first climate bond certified in emerging markets for a single project.

The financing package illustrates the potential of project bonds in funding the Philippines’ infrastructure needs, ADB Senior Investment Specialist Frederic Thomas noted.

The project bond market can initially serve as a venue for companies to recycle capital in brownfield developments and eventually become available to fund the construction phase of projects, Mr. Thomas said.

The forum also cited the P4.1-billion fixed-rate corporate notes of Hedcor Sibulan, Inc., another unit of Aboitiz Power. First Metro Investment Corp. served as the issue’s manager and bookrunner, while Metropolitan Bank and Trust Co. acted as facility and paying agent.

The PDEx can take into account the Tiwi-MakBan and Hedcor Sibulan financing deals in drafting the necessary rules for the listing of project bonds, Securities and Exchange Commission (SEC) member Ephyro Luis B. Amatong noted.

Whether retail investors can participate in the project bond market was among the questions raised during the forum.

“If you look at the risk profile or risk exposure of a project finance bond versus a regular corporate bond, in general, project finance bonds are relatively riskier than regular corporate bonds,” Jose Recon S. Tano, officer in charge of the Bangko Sentral ng Pilipinas’ Office of Supervisory Policy Development.

“So, my question to me is: Is it really appropriate, for now, to introduce these to retail investors or for now, these types of securities will be introduced first to institutional investors or those that have sophistication to understand the risks involved?”

The SEC may supposedly allow the sale of project bonds to retail investors depending on the structure of the financing arrangement. “There are two different models here that I think are both successful. We have First Metro, it’s also power plant, it’s also the same ultimate sponsor but no credit enhancement and yet it was sold properly, I would say, to professional investors,” Mr. Amatong said. “Would the SEC feel comfortable allowing that product to be sold to retail? Probably less so because, as everyone has pointed out, for you to understand the risks requires a certain sophistication that the retail (investors) probably doesn’t have,” the SEC commissioner added.

“But the retail could easily understand the risk exposure of ADB guaranteeing 75% of payment. So for a product that is credit enhanced, similar to Tiwi-MakBan, our attitude with regard to sales to retail might be different.”

In the case of Hedcor Sibulan, the notes received interest from institutional investors, First Metro Vice-President Justino R. Ocampo noted.

“I am not too sure if we see the retail (investors) playing this game in the near future, but we hope or the intention is to expand the pool of professional investors, institutions, that will look at project finance so that later on the banks will have less and less participation in project finance.”

The Philippine Stock Exchange, Inc. (PSE) has instituted similar reforms to support the government’s infrastructure program. Last month, the bourse already published the supplemental listing and disclosure rules applicable to publicprivate partnerships (PPPs) undertaking infrastructure projects.

The approved rules pave the way for companies with PPP contracts worth at least P5 billion to debut on the equities market upon commencing commercial operations or completing construction work or a phase of the project.

The PDEx is taking the same route, holding several forums for purposes of creating the guidelines that will be subject to SEC approval, Mr. Amatong noted.

“What we’re trying to do is build a common understanding, so that later you can see a model where all parts of the financial system have a role,” Mr. Amatong said. “Maybe companies may borrow from the banks during construction and, after 5 to 10 years, they will take the loan out in the form of project bond or some kind of securitization.” —