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Manila: The Philippines said on Friday it expected to issue around $1.5 billion worth of debt-exchange warrants this month to holders of its foreign currency bonds to protect them in the event of a default.
Bids for the warrants, which will allow holders of foreign currency bonds to convert to peso bonds in the event of the government reneging on its sovereign debt, were due by 5 pm New York time (2200 GMT) later on Friday, the government said in a statement.
"We are issuing it to provide protection for bond holders in the event of a default, which is remote," Acting National Treasurer Roberto Tan said.
The only time the Philippines defaulted on its foreign obligations was in 1983 during the dictatorship of Ferdinand Marcos, ushering in a decade of economic difficulties and political turmoil. Marcos was ousted in 1986.
In 2004, President Gloria Macapagal Arroyo declared the country was in a fiscal crisis fuelling talk it could slide into an Argentina-like debt default.
But a number of fiscal reforms, including the imposition of a broader and higher sales tax, helped arrest the government's dwindling finances and Manila aims to balance its budget this year, ending over a decade of deficits.
Monitoring demand
Tan said the warrant issue was also aimed at making Philippine sovereign bonds more attractive to investors as paired warrants carry zero risk weighting for capital adequacy purposes, the same as peso-denominated T-bonds.
Local banks hold as much as 80 per cent of the government's offshore debt, the International Monetary Fund says, and are facing higher charges for holding the offshore debt under new global funding rules.
Currently, two-thirds of the full capital charges is being applied but the full charge will come into effect in 2009, under the Philippines' implementation of the so-called Basel II accord.
The bond warrants will give holders of Philippine sovereign bonds maturing until 2017 the option, in case of a debt default, to exchange their exposure into peso-denominated Treasury bonds maturing in 2018.
Manila could increase the offer to $2 billion if there is big demand in the auction.
The results will be announced on Monday at 9am New York time. A minimum price of $7.50 per warrant has already been set.
The paired warrant is different to credit default swaps (CDS), which also offer insurance-like protection to bond holders, as the CDS settles in cash while the warrant will give peso T-bonds in exchange.
To further boost appetite for the warrant issue, the Philippine central bank said yesterday it had relaxed further its rules on bank holdings of bond warrants.
Transactions involving warrants will be exempted from derivative licensing requirements, the central bank said in a separate statement.
Warrants held for trading will also be exempted from capital charges as long as they are paired with foreign currency bonds.
"This is to encourage maximum participation of the banking industry in the paired warrants programme of the Philippine government," the monetary authority said.
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