State-owned Home Guaranty Corp., (HGC), plans to tap the local debt market as early as February with a seven-year zero-coupon bond that it expects will raise around P7 billion for debt refinancing.
HGC President Gonzalo Bongolan told Dow Jones Newswires in a telephone interview that the state agency expects to name the underwriters for the bond — which he thinks should yield between 8 percent to 9 percent — by next week.
"I think our borrowings deserve a lower yield because interest earnings on our debt paper are tax free," Bongolan said.
Interest income in the Philippines is subject to a 20 percent withholding tax.
HGC was created to provide credit guarantees to promote government housing programs. Over the years, the firm has acquired assets of some P17 billion, primarily from government housing projects. Its outstanding obligations currently stand at P5.7 billion.
At 8 percent yield, HGC will have to pay buyers of its bonds around P12 billion at maturity. A zero-coupon bond is sold at a discount to face value since it doesn’t pay regular interest.
Bongolan said HGC is trying to issue the bond as soon as possible to take advantage of the lower interest rate.
Domestic interest rates have been on a downtrend in recent months due to the government’s improving fiscal performance with the implementation of tax reforms.
At the auction Tuesday, the government sold a 10-year treasury bond at a coupon of 9.250 percent, down sharply from 10.125 percent at the previous auction.
Among those interested in underwriting HGC’s zero coupon bond are First Metro Investment, Development Bank of the Philippines, Equitable PCI Bank, Land Bank of the Philippines, and Rizal Commercial Banking Corp.
The central bank is reviewing HGC’s planned bond to determine whether bank investment in this debt paper can be treated as being in compliance with the Agri-Agra Law, a source said. The law mandates that banks lend 20 percent of their loanable funds to agriculture and agrarian reform projects.
In the past, the central bank has qualified bank investments in bonds of government corporations as alternatives to agriculture and agrarian reform loans, providing additional demand for such paper.
HGC, whose borrowings are guaranteed by the government, last issued a zero-coupon bond in August 2002, raising a total of P7 billion, also for debt refinancing. (Dow Jones)
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