5-year bond rate may drop; peso likely to continue rising

BWorld/ Monday, May 11, 2009 | MANILA, PHILIPPINES

THE FIVE-YEAR Treasury bond is expected to fetch a lower rate at tomorrow’s auction amid ample market liquidity and easing inflation, traders said.

The Bureau of the Treasury is scheduled to sell P8.5 billion worth of five-year bonds tomorrow.

A trader said the five-year paper could fetch between 6.15% and 6.19%, 6-10 basis points (bps) lower than the 6.25% coupon rate awarded when the government swapped the five-year paper for older government debts last January.

This would also be 7.8-11.8 basis points lower than the 6.268% average the paper of the same tenor fetched when it was re-issued last April 14.

The five-year bond traded between 6.1%-6.5% at the secondary market last week.

"There is sufficient liquidity in the system," the trader said, adding that there is enough cash even without the maturing government debts this week amounting to P8 billion.

"Rates could still go down but at a slower rate due to the steepness of the yield curve," the trader added.

He said banks may also easily withdraw their placements at the central bank’s special deposit account, which stood at P591.93 billion as of April 8.

Another trader expects the T-bond to fetch between 6.15%-6.175% as low inflation is expected to entice investors to the offer.

April inflation of 4.8%, the lowest in 16 months and lower than the 6.4% in the previous month, roused hopes the central bank would cut rates anew when it meets on May 28.

The central bank has slashed policy rates by a total of 150 basis points since it began its easing cycle in December. The overnight borrowing rate currently stands at 4.5%, a 17-year low.

"[The five-year T-bonds will be] oversubscribed due to lower inflation expectation. There is appetite for the five-year paper," the trader said.

Meanwhile, the peso is expected to continue its rally as the dollar remains weak against most currencies.

The peso closed at P47.25 to a dollar on Friday, the highest in eight weeks.

A currency dealer said market players are likely to test the P46.80-P47.70 range this week, depending on how the market will react to news abroad.

"We think peso appreciation should continue [this week]," she said. — Gerard S. dela Peña

RCBC raises P4B from debt issue

BWorld/Monday, May 11, 2009 | MANILA, PHILIPPINES

RIZAL COMMERCIAL Banking Corp. (RCBC) said it had raised P4 billion from a Tier 2 notes issue.

RCBC said at the weekend it had closed the order book ahead of the May 12 deadline after raising the amount it needed on Friday.

"The bank received applications of more than the planned volume of P4 billion. The P4-billion order book was filled within just the first seven days of the planned two-week offer period," RCBC said in a statement.

The bank was authorized by the Bangko Sentral ng Pilipinas (BSP) to raise as much as P4 billion in unsecured subordinated debt notes qualifying as lower Tier 2 capital.

Tier 2 capital is supplementary capital that ranks behind the claims of depositors in the event of insolvency.

Aside from RCBC, Banco de Oro Unibank, Inc., the country’s largest, raised P3 billion in Tier 2 debt in March. BDO was followed by the Metropolitan Bank & Trust, the second largest, which raised P4.5 billion in Tier 2 debt the following month.

RCBC’s lower Tier 2 debt offer has a 10-year maturity, with a call option to allow it redeem the notes at 100% of the principal plus accrued and unpaid interest by the fifth year, subject to BSP approval.

The notes were priced at 7.75% per annum with quarterly interest payments. The issue date has been set on May 15.

The proceeds of the debt issue are intended to strengthen the bank’s capital base and expand its branch network.

Standard Chartered Bank was the sole arranger, bookrunner and market-maker for the Tier 2 notes.

RCBC is among the 10 largest banks in the country with consolidated resources amounting to P267.2 billion as of the first quarter. It reported a 33% drop in net income last year to P2.15 billion from P3.2 billion in 2007 amid tough economic conditions. — Reuters and Gerard S. dela Peña

Stockbrokers to ask SC to invalidate bourse ownership cap

BY KRISTINE JANE R. LIU, Reporter
Monday, May 11, 2009 /BWorld| MANILA, PHILIPPINES

STOCKBROKERS will ask the Supreme Court (SC) to declare as unconstitutional a law forcing them to dilute their collective ownership of the Philippine Stock Exchange (PSE) to just a fifth.

"The Philippine Association of Securities Brokers and Dealers, Inc. (PASBDI) Board has approved that we move the case to the Supreme Court. In the next few months, I think that will be possible," PASBDI Governor Ismael G. Cruz said over the weekend.

The group last month has sought the recommendations of the Quasha Ancheta Pena & Nolasco law firm whether the brokers have valid grounds to file a petition to nullify the law that limits to 20% the ownership of the exchange by any group.

The firm advised PASBDI to file a petition before the High Court to have the provision declared unconstitutional or compel the Securities and Exchange Commission (SEC) to permanently relieve the bourse of the ownership caps as an alternative in case the Supreme Court upholds the limitations.

Mr. Cruz said they have waited long enough for SEC to relieve them but the corporate regulator continues to thumb down their request.

"We will comply with whatever the Court [decides] whether as an interim measure or as permanent measure. It is [up for the] court to say whether or not in the meanwhile [PSE] should comply," PSE President Francis Ed. Lim said.

Mr. Lim said there is also a pending request with the SEC to remove the P500 per day penalty which, he said is inconsistent with the corporate regulator’s decision to defer the implementation of the law this year.

The SEC last month allowed the exchange to breach the ownership caps, deferring the scheduled implementation of the limits this year, but increased the fine to P500 a day from P100. At present, the brokers collectively hold 31% of the exchange.

Prior to the merger of the Manila Stock Exchange and the Makati Stock Exchange in 1992, both exchanges were member-governed organizations and were not open to the public.

The 20% limitation came in the aftermath of the stock price manipulation scandal involving BW Resources Corp. that rocked the bourse in 1999.

This became a requirement when the exchange was "demutualized" or converted from a member-owned company into a shareholder-owned firm in August 2001 to remove the perception that the PSE is an "old boys club."

The new Securities Regulation Code (SRC) also allowed non-brokers to own majority of the bourse by occupying eight board seats, compared to seven held by brokers. As a result of demutualization, the ownership of brokers decreased from 100% in 2003 to 38.11% in November last year.

Under its rules, the SEC has the power to exempt the exchange if it proves that its ownership structure does take away from the exchange’s ability to operate in the interest of the public.

"The brokers can argue that the SEC has failed to properly evaluate the impact of the brokers’ ownership or recognize that the exchange is operating effectively and that the public interest is served when the brokers’ ownership has been broken down," Quasha Ancheta Pena & Nolasco said in a 27-page position paper submitted to PASBDI last month.

The paper added that the demutualization of the exchange was being supervised by the PSE, noting actions such as a pending request for the SEC to reclassify 19 inactive brokers as non-brokers to further lower brokers’ collective ownership to 31.9%.

The law firm also pointed out that the PSE had implemented an extensive reorganization to prevent brokers from controlling the exchange, including the formation of various committees for governance and the election of independent officers as president and chairman of the exchange.

This was on top of other measures such as public listing by way of introduction of PSE shares in 2003 and the private placement of 39.78% of PSE shares to institutional investors a year later, to dilute brokers’ stakes.

The firm also said the brokers are being compelled to sell their shares at rock-bottom prices considering the unfavorable market conditions, making it even more unreasonable because the brokers are compelled to sell even if there are no buyers to take their shares.

Aside from the ownership cap, PSE Director Vivian Yuchengco said the exchange is also considering going to the Congress to amend the SRC.

Mr. Lim said although there is still no specific plan yet how SRC will be implemented, he said they plan to make it more "market-friendly."

"There are a lot of things there that needs improvement but presently what we want to do first is to get all the tax incentive to improve market liquidity and to improve the number of listed companies... But the SRC amendment is part of the agenda," Mr. Lim said.

Among the provisions which he said could be amended include the provision which states that if one is a broker of a listed company, his brokerage house cannot trade the shares of the listed company.

"[Certain provisions] are anti-market and it really affects [our] liquidity which is [currently] a big issue in our stock market," Mr. Lim said.

He said the exchange has already talked to the SEC and is already in the process of identifying what needs to be amended for the SRC to be more market-friendly.

"[The exchange] already has a lot of system, such as the surveillance system, which can prevent insider trading. [Certain] provisions in the SRC are already unnecessary," Mr. Lim said.

Investment banks and hedge funds: The death sentence

Written by Free Enterprise / Jean d’Orival

Thursday, 16 April 2009 19:51

THE good thing in a revolution is that it destroys myths and removes polluting players. If there is something we have learned (or relearned) from the current global crisis, it is that liquidity and funding capabilities are major risks to be analyzed before making any investment decision. When I started in the capital markets back in 1984 , that is the first thing you were taught. However basic, these investment criteria have been largely forgotten or ignored by the investment banks and hedge funds. The investment-bank model is dead THE world was shocked when Bear Stearns collapsed in March 2008. Then came the Lehman Brothers bankruptcy (the largest in US history) that sent shockwaves and threatened the world financial system in September 2008. This was followed by the collapse of Merrill Lynch and the quasi-collapse of Morgan Stanley. The world suddenly (and sadly, too late) realized that these banks were built on fragile and shaky grounds. What did all these banks have in common? • A low capitalization (compared with the massive risks they were taking); • Highly leveraged balance sheets; • A small and undiversified deposit base; • A large exposure on illiquid products; • Large funding needs; and • An overreliance on money markets for funding. They were structuring huge and complex deals, forcing them—sometimes willingly—to hold large positions of papers like lower-rated mortgage-backed securities while waiting to find buyers. These positions needed, of course, to be financed. I advised my clients as early as July 2007 to stop buying papers issued by US investment banks. Then, in late summer 2008, the “fear factor” set in and the funding markets suddenly froze. The explosion of the (real or perceived) credit risk led all funding markets to stop functioning. The heart of the whole financial system— the money markets—came to a halt. The banks stopped lending to each other, preferring to park their funds in government securities—even sometimes at negative yields!—or just leaving them on their current accounts. This sparked a violent reaction and affected the whole financing chain, from the banks to the financial intermediaries, down to the consumer finance companies that led to a full-blown economic downturn. The universal banks with sizable investment-banking activities were also severely hit, but managed to survive due to their bigger capitalization and, most of all, to their large and diversified retail-deposit base (UBS, Deutsche Bank or HSBC, for example). The purely investment banks with huge funding needs and overly relying on money markets, collapsed like a castle of game cards (as we say in French). The investment-banking model is dead and, given the tsunami we experienced, will never recover in its existing form. The remaining “independent” investment banks understood that quickly and morphed into banks. Goldman Sachs and Morgan Stanley are now fully licensed banks allowing them, among other things, to access the retail-deposit market. Long live the universal banks! A ‘purified’ hedge-fund model can survive THE hedge-fund model as we know it, is dead unless it transforms itself. The lack of regulation and supervision has been identified as the major factor behind their failure by all the screaming heads of government. It is partly right and needs to be addressed. But it is only one of the faces of the hedge funds evil. What happened during the crisis? First, like the investment banks, a large number of hedge funds relied on borrowings to finance their strategies. In addition, many were highly leveraged. And, cherry on the pie, they were often financed by the investment banks themselves! Imagine the minefield…. More important, and that is the main reason the hedge- fund model as we know it has to die, they showed a complete disregard for their investors. Their behavior came down to a simple sentence: “Give me your money and I will steal from you right and left, top and bottom, and front, back and center!” What many investors didn’t know, ill-advised by their greedy private bankers, is that the investment agreements for hedge funds were full of tiny written clauses allowing the funds to change the rules of the game right in the middle of the investment! The hedge funds were very imaginative in finding new concepts like market- value reduction in case of “poor market conditions.” As a result, when things turned sour, they decided overnight to freeze the redemptions, to stagger the redemptions over many months or years, or to purely and simply postpone the redemptions ad vitam eternam until conditions get better! It basically means that even if you wanted to, you couldn’t get out of your investment. What happened to the beautiful promises of weekly or monthly liquidations? Disappeared…. To add insult to injury, in many instances, the subsequent exit strategies proposed to their clients was that the client had to decide today if they wanted to sell in three months’ time at a price fixed in three months on a value, of course, entirely at the discretion of the hedge fund itself, and therefore unverifiable! It was take it or leave it. So after having stolen from their clients a first time, they did it again a second time…. The hedge-fund industry can survive but will have to be strictly regulated, much more transparent and, above everything, respect their clients. Rules to force the funds to ensure their own liquidity must be established. More important, the hedge funds must be obliged to provide liquidity to their clients according to its initial and preannounced liquidation policy and without any force majeure clause. The fund of hedge funds (FoHF) model is dead and buried FUNDS of hedge funds were very popular strategies used, among others, to diversify the risks by using many different fund managers and many different fund strategies. The FoHF would, therefore, invest in many different hedge funds, which would smoothen and level the risks and performance of the FoHF itself. But instead of reducing the risks, it multiplied the risks. The liquidity issues seen above became exponential. FoHF managers suddenly had zero control over their own liquidity and therefore couldn’t ensure the liquidity of their clients. They were completely dependant (hostages) on the goodwill of each of the underlying funds. Imagine: instead of one fund restricting redemptions, you have to deal with 20 funds, each of them having different ways of “stealing” their investors! It is obviously unmanageable but nobody thought about it before the disaster occurred. Even with very strict rules, and given what happened, this model will never recover, simply because in situations of intense stress, it becomes impossible to manage. S imple piece of advice: Do not invest in investment banks (if there are any left), do not invest in funds of hedge funds and do not invest in hedge funds until clear and mandatory liquidity rules are established. I much prefer private-equity funds: at least you know in advance that you are in for the long term, that it is a risky investment and that it has no liquidity. Analyzing the liquidity of your portfolio is something that I’ll be glad to do for you! **** Jean d’Orival is the chairman of Dorias Advisors Inc. Free Enterprise is a rotating column of members of the Financial Executives Institute of the Philippines (Finex), appearing every Wednesday and Friday.

Peso seen hitting 46:$1 by midyear, 52:$1 by end-2009

Erik dela Cruz / Reporter

Wednesday, 15 April 2009 21:09

THE next nine months may see wild swings in the foreign-exchange rate as the peso may gain further strength up to 46 per dollar by the middle of this year, but may eventually lose ground in the second half and end the year at 52, according to a new research report from Metropolitan Bank & Trust Co. (Metrobank).

The peso has fallen by 0.9 percent so far this year, slowly recovering after an 1.7-percent loss in the first quarter.

“Currently, the peso has been appreciating alongside other currencies as risk aversion has tapered off for now amid the big upward strides in major equity markets around the globe,” said Ildemark Bautista, Metrobank head of research.

“The question, therefore, on everyone’s mind is if this is only temporary or will depreciation still be in the cards,” he said.

The peso is bound to appreciate in the near term, he said, with support coming from remittances of Filipinos abroad which traditionally surge during this time of the year, and with dollar requirements weak at the same time.

Remittances are usually on an upswing a few weeks before the start of a new school year in June.

“In the very near term...trends point to a direction towards the 46-per-dollar level going towards midyear as OFW [overseas Filipino worker] inflows dominate amid current market optimism,” he said.

But Metrobank’s research team, he said, was maintaining its view of peso depreciation toward the end of 2009, “perhaps running as high as 52…50 per dollar, or at least going up to the 51 level.”

The continued weakness of the Philippine economy and the need to prop up growth through bigger deficit spending will contribute to weak sentiment toward the peso, Bautista said.

Demand for dollars, however, may rise even before the import season in the third quarter, capping the peso’s gains in the second quarter, he said.

With dollar requirements normally increasing and remittances slowing down in the third quarter, he said the peso may be bound to again depreciate at that time.

“Expectations such as this might temper the current peso strength, as importers might buy earlier and produce marginal dollar demand right now instead of in the third quarter,” Bautista said.

The recent rally on Wall Street reflected investors’ upbeat mood as companies start reporting better earnings, which could be the result of the relaxation of mark-to-market (MTM) rules, he said.

“MTM rules require that assets not being held to maturity should be priced at market levels, and in a poor market environment such as the one right now, this means markdowns and lower earnings [as writedowns are treaded as expenses] or lower asset prices,” he said.

“With these rules now being relaxed, it appears that markets are riding along, willing to suspend disbelief right now about how bad things might be, giving the equity markets a big boost.”

Still, he said some investors viewed the recent bull run in the US with caution as it appeared “too much, too far, too soon,” and that a correction might be in the offing.

The peso rose on Tuesday to as high as 47.65 per dollar, its strongest level in two months following the greenback’s broad weakening in the previous day, which indicated waning risk aversion.

In a report released last week, Moody’s Investors Service said the peso must be kept stable if the government wants to support economic growth.

RP deficit, US concerns drag peso lower

Erik de la Cruz / Reporter

Tuesday, 21 April 2009 21:29

CONCERNS about the Philippines’ budget deficit and the health of the US financial system pulled down the peso to a three-week low against the greenback on Tuesday, dealers said.

The local currency slumped to an intraday low of 48.49—its weakest intraday value since March 31 when it fell to 48.58—before settling at 48.46, down almost 0.8 percent from Monday’s close of 48.09.

“The Philippine peso has started weakening again, but this is likely to be due to domestic concerns regarding its widening budget deficit,” said Philip Wee, currency strategist at DBS Bank.

The government has further raised the deficit ceiling this year to P199.2 billion, or 2.5 percent of the gross domestic product, from P177.2 billion as it intends to pump-prime the economy despite expectations of weak revenue. The official 2009 economic growth forecast has been cut to 3.1 percent to 4.1 percent, from the previous estimate of 3.7 percent to 4.4 percent, to account for weak exports.

Concerns about the stability of US banks, which sparked selloffs in the equities markets, also weighed down the peso, dealers said. The major US equity indexes dropped by 3 percent to 4 percent on Monday.

“Risk aversion is back after weak results from Bank of America reignited worries about the US financial system and the economy, setting off a broad-based fall on Wall Street,” said dealers at Metropolitan Bank & Trust Co. (Metrobank) in a note.

The dollar rallied as the fall in equities increased the greenback’s safe-haven appeal, dealers said. On the domestic front, they said growth and fiscal concerns added to pressure the peso downward. The budget deficit hit P67 billion in the first two months of the year, more than double in the same period last year, as the economic downturn resulted in weak revenue that prompted the government to spend more to boost economic activity.

The peso is expected to trade between 48.30 and 48.60 today, said Banco de Oro chief market strategist Jonathan Ravelas. Dealers at Union Bank of the Philippines said 48.50 is the dollar’s immediate resistance level.

Metrobank expects the peso to reach 52.50 per dollar by the end of 2009, given shrinking inflows as exports contract and remittances of Filipinos abroad post flat or negative growth.

‘Sari-sari’ stores as agent banks?

by Jun Vallecera / Reporter

Wednesday, 22 April 2009 21:56

THE Bangko Sentral ng Pilipinas (BSP) is seeking legal opinion on whether they have basis for allowing third-party entities, such as sari-sari (retail) stores, to act as agent banks.

The plan, which includes such other agents as retail chain stores and government-owned post offices, forms part of the larger program of financial inclusion.

Financial inclusion, as the term suggests, ideally includes every Filipino to have access to financial services that often leaves out the rural-based population as farmers and fisherfolk.

Deputy BSP Governor Nestor Espenilla Jr. acknowledged it took them one year to convince authorities, the policymaking Monetary Board included, to sell the idea of the e-money, or electronic money popularized by Globe Telecommunication’s G-Cash product and by Smart Communication’s Smart Money.

The hardest thing about this product, according to Espenilla, was convincing everyone they were not deposits, which then complicates regulation.

“It took us a year to put it together, including the appropriate circular,” he said.

The same thing is happening about the plan allowing sari-sari stores, retail chains such as 7-Eleven and Mercury Drug Stores and various post offices to act as agent banks.

Under the plan, the neighborhood sari-sari store is empowered to help the financial inclusion program become reality by allowing it to act as cash centers where one can buy or encash so-called e-money.

Globe’s G-Cash centers and its equivalent Smart Money services are mostly urban-based products.

According to Espenilla, the Philippines is one of the leading proponents of e-money, along with Kenya and certain other Latin American countries like Brazil.

But the Philippines has a potential to become a pioneering entity in e-money transactions because most Filipinos own a cellular phone.

In Brazil, for instance, e-money usage is via points-of-sale, or POS, which is limited in nature, Espenilla said.

When approved, Filipinos may convert hard cash into e-money in any sari-sari store and send it via cell phones to pay for utilities charges, settle a personal debt or even make a deposit, he said.

“The question now is whether we can use third-parties like sari-sari stores to act as agent banks. We are in the process of seeking a legal opinion,” Espenilla said. He ruled out authorizing sari-sari stores as deposit-taking entities, however.

“I have problems enough monitoring the activities of regular banks, I don’t want added pressures at this point,” Espenilla said.