HypoVereinsbank may be close to succeeding where others have failed and actually execute an asset-backed securitization out of the Philippines. The bank is currently testing market appetite for a $170 million deal for MRTC - the consortium responsible for building the 16.8 kilometer railway that runs over the EDSA highway in Metro Manila. Formal launch of the deal will take place at a presentation in Manila next Friday.
Assuming the response from investors meets both the arranger and issuer's expectations, the deal will be priced during the week after the presentation, with closure scheduled for the middle of March.
This would make it the first Philippine ABS since 1997 when JPMorgan arranged a $75 million securitization of air ticket receivables for Philippine Airlines. It would also provide HypoVereinsbank with a suitable riposte to some of the more cynical ABS bankers in Asia who believe that trying to get securitization deals out of the Philippines is a waste of time and effort.
The MTRC transaction will be backed by equity rental payments received by the MRTC consortium - comprising Anglo-Philippine Holdings Corp; Allante Realty and Development, DBH; Fil-Estate and Ramcar - from the Department of Transportation and Communication (DOTC).
These payments will be made in accordance with the 25-year build-lease-transfer agreement signed in 1999 between the DOTC and the consortium, which guarantees the MRTC a certain amount of revenue from the project for 25-years. Construction was completed in June 2000.
According to a well-placed observer, members of the consortium are willing to sell part of their rights to receivables because it will allow them to get much-needed funds that will allow them to bid for other construction projects.
The observer says that the deal structure has been kept as simple as possible to attract both international and domestic investor interest. "The idea was to avoid complicating things because activity has been very limited out of the Philippines," he says. "We think that the involvement of the DOTC - a government agency - in the deal is appealing to investors because the underlying revenues paid to the MRTC are secure, even if the trains don't run.
"International investors don't have to worry about currency issues because the equity payments are in US dollars not pesos," the observer adds. "It was also important not to confuse matters with external credit enhancement or to structure it so it was deeply subordinated. With this kind of deal, investors need to understand how it works."
It is 99.99% certain that Fitch - which also rated the S$200 million securitization arranged by HypoVereinsbank for property developer CapitaLand in Singapore last June - will rate the deal at the sovereign level, currently BB+, because the DOTC's involvement is effectively a government guarantee. This minimizes any chance of the bonds going into default.
Nevertheless, investors can expect a healthy premium over government bonds. "We'll be getting a sense of what (pricing) investors are looking for in the next week and at the presentation," the obersver explains. "Even though it's likely to be rated at the sovereign level, I think it will price at a considerable premium over sovereign paper. It's a fairly sizeable deal, coming as it does from an emerging market, and securitizations commonly price at a premium anyway. It will be more than 10 or 20 basis points over, but how much over will be determined after the presentation."
The deal has been structured in a way that will appeal to different types of investors. It will feature three tranches - all presumably will be rated BB+ - in each of which will be three series of notes.
The first tranche will have maturity of five years and will offer a nominal coupon. There will also be two zero coupon tranches, one of which will mature between 2008 and 2014, and the other in 2025, with amortization from 2015.
"The deal needs to attract as wide an investor base as possible, which meant structuring it to match assets and liabilities," the source says. "The five-year tranche, for example, will appeal to investors such as emerging market funds, buyers which are really looking for the spread. The other two tranches will appeal to long-dated investors like insurance companies, and even though they feature zero coupons, I would think that the bonds will price at a significant discount, providing a healthy pick-up."
While acknowledging that the deal encountered a few legal difficulties, the source said these were not related to the Philippine ABS Bill, which Congress is expected to pass in the near future.
"That was not an issue for this deal because it's an offshore deal and the assets themselves are denominated in US dollars," explains the source. "Securitizations can take additional time to sort out legal problems, however.
"Allen & Overy was hired as legal advisor to ensure the special purpose vehicle was bankruptcy remote and there was also the problem of making sure all the parties involved [including all the companies that make up the consortium as well as the DOTC] were happy. That, understandably, took time to sort out."
