LGU Investment Guarantees,

Municipal Bonds and

Creditworthiness:
Challenges and Opportunities

by

LYDIA N. ORIAL
President/CEO
LGU Guarantee Corporation
 WHO WE ARE

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 RATIONALE FOR ESTABLISHING LGUGC

 LGUs hesitant to borrow from the private financial

market

 PFIs do not have bank relationship with LGUs

 NG resources insufficient
1997 Data
25
25

20

15
11.08
Pesos
10
(billion)
5

0
Potential Demand Supply

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 WHAT WE DO

CREDIT
GUARANTEE

GUARANTEE
PROGRAM
MANAGEMENT
CREDIT
RATING

RELATIONSHIP COLLABORATION WITH

MANAGEMENT WITH NATIONALGOVERNMENT
FINANCIAL INSTITUTIONS & DONOR AGENCIES
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 GUARANTEE SYSTEM

• Guarantees FIs against default • Provides loans, or

• Pays FIs in case of default according to original schedule • Underwrites bond issues

AAA
Due Diligence / Credit Rating

LGUs/WDs/ECs/RETP/s
Financial Institutions
• Pays loans / bond amortization

• Calls on guarantee upon default

40% co-guarantee
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 LGUGC-CLOSED DEALS (as of August 2009)
Accounts Bond Guarantee d Outstanding
(amounts in P million) Amount Amount Guarantee
1. Urdaneta City P 25.00 P25.00 P 0.00
2. Province of Aklan 40.00 40.00 0.00
3. Puerto Princesa City 320.00 320.00 0.00
4. Caloocan City 620.00 620.00 0.00
5. Tagaytay City 220.00 220.00 0.00
6. Iloilo City 130.00 130.00 0.00
7. Municipality of Daraga, Albay 75.00 75.00 0.00
8. Municipality of Bayambang, Pangasinan 42.00 42.00 0.00
9. Province of Leyte 205.00 205.00 0.00
10. Municipality of San Juan, Metro Manila 390.00 390.00 0.00
11. Municipality of Carmona, Cavite 150.00 150.00 60.00
12. Pasay City, Metro Manila 500.00 500.00 275.00
13. Municipality of Imus, Cavite 47.00 47.00 18.80
12. Municipality of Baliwag, Bulacan 50.00 50.00 39.00
Total Bond Issuances P 2,814.00 P 2,814.00 P 392.80
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 LGUGC-CLOSED DEALS (as of August 2009)
Accounts Loan Guarantee d Outstanding
(amounts in P million) Amount Amount Guarantee
1. Agoo, La Union P110.00 P93.50 P93.50
2. Imus, Cavite 23.00 19.55 19.55
Total LGU Loan Releases P133.00 P113.05 P 113.05
1. Metro Iloilo WD P38.13 P32.41 P23.23
2. Calamba WD 40.00 34.00 24.08
3. Legazpi City WD 105.00 105.00 87.50
4. Silang WD 189.00 160.65 119.00
5. Laguna WD 99.49 84.56 78.30
6. City of San Fernando WD 226.00 192.10 192.10
7. Indang WD 15.00 12.75 12.75
8. Cabanatuan City WD 250.00 212.50 142.54
9. Mabalacat WD 135.00 114.75 34.00
10. Norzagaray WD 70.00 59.50 29.75
Total WD Loan Releases P1,167.62 P1,008.22 P743.25
TOTAL P4,114.62 P3,935.27 P1,249.10
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 LGU INVESTMENTS: Challenges and Opportunities

CHALLENGES OPPORTUNITIES

 Limited reach  Anchored on PFI/FA network

 Partnered with key LGU financing
institutions: DOF-BLGF, DILG, BSP,
donor agencies

 Aggressive marketing stance of GFIs
using ODA funds
 Low interest rates and no other fees
such as origination and commitment
fees
 50% risk weight on LGUGC guaranteed
bonds
 Increasing PFI appetite on LGU financing

 Technical evaluation  Technical assistance

 Bond pooling (lower class, small
amounts)
 Prompt payment guarantee fee

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MUNICIPAL
BONDS

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 WHAT IS A BOND

“any interest-bearing or discounted government or

corporate security that obligates the issuer to pay the
bondholder a specified sum of money, usually at specific
intervals, and to repay the principal amount of the loan at
maturity.

Bondholders have an IOU from the

issuer but no corporate ownership
privileges, as stockholders do.”
 ADVANTAGES OF BOND FLOTATION

1. Ensures transparency in LGU project implementation

2. Allows LGU constituent involvement through bond purchase

3. Encourages ring-fencing of an LGU enterprise making it possible for

the LGU to determine whether or not it is earning from the project

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 ADVANTAGES OF BOND FLOTATION
INTEREST RATE DIFFERENTIAL
Loans vs. Bonds
LOANS BONDS
Reference Rate (1-month PDST-F as of 9/14/09) 3.9908%
Lending Rates (Actual)* 8.6325%
Add-on Rate 2.0000%
Trustee Fee 0.5000%
Guarantee Fee 1.0000%
Total Annual Fees 8.6325% 7.4908%
Commitment Fee 0.5000%
Handling Fee 0.7500%
Underwriting Fee 1.0000%
Total Up-front Fees 1.2500% 1.000%
Total Annual Fees 8.6325% 7.4908%
Total Up-front Fees (over 10 years) 0.1250% 0.1000%
TOTAL FEES 8.7575% 7.5908%
* Average lending rates of LBP (9.2150%) and DBP (8.0500) and PDST-F as of September 14, 2009
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 BOND ISSUANCE PROCESS AND TIMETABLE
Timetable (in months) 1st 2nd 3rd 4th 5th 6th
1. Project development, feasibility study preparation, The bond issuance process shall not
and hiring of a financial advisor, BLGF and DAR/ include this period but will commence
DENR Certification after the completion of this activity

2. Sanggunian ordinance approving the project

3. Selection and appointment of a Bond Issuance Team
4. Designing the features of the municipal bond
5. Securing the guarantee for the municipal bonds
6. Sanggunian ordinance approving final bond terms
7. Sanggunian Panlalawigan’s validation of the
ordinance of the municipal bond issuance by a
component city/municipality
8. BSP favorable opinion
9. Preparation of the Official Statement, Primer and
bond documents
10. Municipal bond offering and issuance
11. Debt servicing and payment of the principal This period shall cover the date of
issue up to the maturity date
 PROJECT MONITORING BOARD

GUARANTOR
GUARANTOR
(LGUGC)
(LGUGC)

TRUSTOR
TRUSTOR TRUSTEE
TRUSTEE UNDERWRITER
UNDERWRITER
(LGU)
(LGU)

 Monitors project status (Works Engineer to be hired)

 Monitors financial status
 Identifies potential problems, recommends remedies,
and monitors compliance
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 MUNICIPAL BONDS: Challenges and Opportunities
CHALLENGES
 Aggressive marketing stance of GFIs for
LGU loans with longer tenors at fixed
rates
 NGA issuance of pertinent permits
OPPORTUNITIES
 Agri -Agra Alternative Compliance
 50% risk weight on LGUGC guaranteed
bonds
 Eligibility of LGUGC-guaranteed bonds
as reserves for insurance companies
 Ability of PFIs to extend loan/bond
tenor
 Competitive rates; variable with one-
time option to fix
 Fast processing
 Market liquidity; increase in bond
investors
 Community investment participation
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CREDITWORTHINESS

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 WHAT IS CREDITWORTHINESS

A creditor’s measure of an individual’s or

company’s ability to meet debt obligations
 CREDIT RATING

LGUGC’s internal LGU credit rating system aims to

promote LGUs as viable borrowers for private
financial institutions and issuers of debt instruments,
to facilitate their access to capital markets through a
structured information base on their overall
creditworthiness

Factors considered:
• Political Risks
• Economic Risks
• Operating and Management Risks
• Financial Risks

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 CREDIT RATING

Short-term
Management Indicators
CREDIT
RATING
Operating Financial
Performance Condition

Development Capacity and Socio- Long-

CREDIT Economic Endowment term
Indicators
SCREENING
Tendency for Efficient Debt Repayment

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 CREDIT SCREENING AND RATING
METHODOLOGY
Credit Screening Credit Rating

1.A
1.B Aaa
A 1.C Aa
Risk of Development
Unilateral 1 Risk B Operating
1.D A
Restriction Management
of Debt C 2.A Ba
Economic & Political Financial
Payments 2 Endowment Risk
D 2.B C
2.C D
2.D

TENDENCY FOR DEVELOPMENT AND OPERATING & MANAGEMENT

DEBT ENDOWMENT FINANCIAL
PAYMENT CONDITION RISK
 CREDIT RATINGS

Aaa - highest credit standing

Aa - high credit standing
A - good credit standing
Ba - average credit standing
B - below-average credit standing
C - poor credit standing
 RATED LGUs
LGU Rating LGU Rating LGU Rating
1. San Juan, MM Aa 16. Alfonso Lista, Ifugao Ba 31. Puerto Princesa City Ba

2. Agoo, La Union A 17. Antipolo City Ba 32. Rosario, La Union Ba

3. Aklan A 18. Bayambang, Pangasinan Ba 33. San Fernando City, Pampanga Ba

4. Baguio City A 19. Binangonan, Rizal Ba 34. Santiago City, Isabela Ba

5. Baliwag, Bulacan A 20. Butuan City Ba 35. Surigao City Ba

6. Carmona, Cavite A 21. Calasiao, Pangasinan Ba 36. Urdaneta City Ba

7. Cagayan A 22. Caloocan City Ba 37. Aliaga, Nueva Ecija B

8. Imus, Cavite A 23. Daraga, Albay Ba 38. Calbayog City, Samar B

9. Lucena City A 24. Iloilo City Ba 39. Palayan City, Nueva Ecija B

10. Mariveles, Bataan A 25. Iriga City Ba 40. San Vicente, Palawan B

11. Tabaco City, Albay A 26. Kawit, Cavite Ba

12. Tagaytay City A 27. Leyte Ba

13. Taguig City A 28. Masbate City Ba

14. Taytay, Rizal A 29. Orani, Bataan Ba

15. Zamboanga del Norte A 30. Pasay City Ba

 LGU DEBT MARKET (as of March 2009)

Approved % Availment/ Default

FI Amount* Share Disbursed* Rate
A. GFIs
DBP 17,507 16% 12,610 < 1%
LBP 74,157 68% 60,508 <1%
Sub-total 91,664 85% 73,118
B. PFIs
LGUGC 2,947 3% 2,926 0
PNB 9,926 9% 8,242 0.04 %
PVB 1,411 1% 1,238 0
Others 2,334 2% 2,334
Sub-total 16,618 15% 14,740

TOTAL 108,282 100% 87,857

* in Million Pesos

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CREDITWORTHINESS: Challenges and Opportunities

CHALLENGES OPPORTUNITIES

 Lacked of published LGU credit rating  LGUGC’s internal LGU Credit Screening
system and Rating System
 High rating cost
 LGU compliance with data
requirements

 Project monitoring board, works

 Project completion engineer and trust fund

 Increasing LGU debt market portfolio

 Political risk perception with almost zero default

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CHALLENGES
 Unconventional LGU projects
 Substantial funding requirement
 Feasibility study preparation
 Political will / dynamism of local
officials
ENR FINANCING
OPPORTUNITIES
 Technical assistance
 Adopt DOF Policy Framework for LGU
Financing
 Availability of affordable financing
modes from both the public and private
sectors (with project preparation
component)
 Emerging dynamic local chief executives
 Showcase successful projects
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 Thank
LGU Guarantee Corporation
You
Tel. No.: (02) 751-8764 to 68
Fax No.: (02) 888-4217
Email: dengorial@lgugc.bayandsl.ph
Website: www.lgugc.com 26