Department of Finance/Bureau of the Treasury Onshore Dollar Bonds ( ODBs ) FAQs 13 November 2012

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1 Department of Finance/Bureau of the Treasury Onshore Dollar Bonds ( ODBs ) FAQs 13 November 2012 These materials are not an offer of securities for sale in the United States, and securities may not be offered or sold in the United States absent registration or an exemption from registration. Any offering of securities by the Republic of the Philippines (the "Republic") in the United States would be made by means of a prospectus, which would be obtainable from the Republic and would contain detailed information about the Republic, including certain statistical information. There will be no public offer of securities in the United States. I. Indicative Terms and Conditions 1. What are the objectives of this issue? The issue aims to address the need to finance the National Government and its instrumentalities to service a portion of its obligations for Diversify ROP s investor base away from traditional US$ global bond investors Take advantage of excess liquidity of US$ in the domestic market Serve as an additional funding tool for the ROP Improve ratio of external vs. internal indebtedness Develop the local bond market by introducing a new funding instrument Reduce ROP s reliance on offshore borrowings Provide another investment alternative to local investors Establish a pricing benchmark and trading convention for corporates that also want to take advantage of domestic US$ liquidity To provide an investment outlet for domestic investors who will participate in the tender offer of ROP bonds 2. What are the Key Features of the Bonds? The ODBs will combine features of Peso Government Bonds and ROP Global Bond issuances. It would provide ROP with US$ funding using terms consistent for Peso FXTNs. The Bonds will be US$ denominated but will be settled onshore and listed on a domestic trading system through PDEX. In terms of ranking, the Bonds will be direct, unconditional and unsecured and will rank pari passu with all other present and future unsecured and unsubordinated Foreign Currency Indebtedness of the ROP. 3. Are the Bonds classified as onshore or offshore indebtedness? The Bonds will be considered an onshore borrowing. Under BSP guidelines, the residency of the creditor and not the currency in which the indebtedness is denominated is determinative of whether an indebtedness is domestic or foreign. 4. Where will the proceeds of the Issue be used? The proceeds of this fund-raising is to fund the general financing requirements of the National Government

2 5. Who are the eligible investors of the Bonds? Given the issuance format, onshore listing and governing law, the eligible investors are primarily resident banks with FCDU deposits. Financial institutions, other corporate and individual investors, tax-exempt institutions, insurance companies and trust funds with dollar placements, can also invest in the Bonds. This issue will also be available to GOCCs and GFIs. 6. Are there any known restrictions for non-residents holding the Bonds? No, there are no known restrictions for non-residents holding the Bonds. The Bonds are not offered in other jurisdictions. 7. What are the tax implications for holding the Bonds? Principal and interest payments on the Bonds will be made by ROP free and clear of any present and future withholding taxes since withholding taxes will be assumed by ROP. As such, all holders will get the same coupon regardless of their tax status as if no tax was withheld from them. The BIR has issued a ruling to this effect. To illustrate: If the Bonds have a stated interest of 2.5% interest per annum, a bondholder will receive interest equivalent to the full 2.5% per annum, since the interest payable by the Republic shall be made without deduction on account of the applicable final withholding tax (regardless of the applicable tax rate). 8. Would interested investors with an existing RoSS account need to open a new one with the BTr? RoSS accounts that are already tax tracked because of previous transactions do not need to open a new RoSS account. However, RoSS accounts with no tax-tracking feature need to open a new RoSS account that will be tax-tracked. 9. What is the risk-weight assigned to holding the Bonds? The Bonds will have a risk-weighting of 100% as it is denominated in a foreign currency. 10. Will the Bonds be subject to DST? Yes, the Bonds will be subject to DST. Based on the draft indicative Terms and Conditions, payment of DST on the primary issuance shall be for the account of the Republic. However, the transfer of the Bonds in bearer form in the secondary market by way of simple delivery to the buyer is not subject to DST, unless the transfer carries with it a renewal and issuance of new security in the name of the transferee to replace the old ones. Hence, for this reason the secondary trading thereof in the name of the transferee will no longer be subject to DST. (BIR Ruling No dated March 27, 2003) 11. Being a tax-assumed instrument, what proof will the investor get that the relevant tax has been paid? The BTr as withholding agent may issue a certificate (BIR Form 2306) stating the amount of tax withheld on coupon payment. 12. Is there exemptive relief from the tainting rule (under PAS 39) if an investor who participated in the on-going tender offer of ROP bonds uses the proceeds to purchase the ODBs? 2

3 Yes. The Securities and Exchange Commission ( SEC ) in its meeting on 04 October 2012 resolved to grant an exemptive relief from the tainting rule of PAS 39 to all holders of HTM-ROP bonds eligible for tender, if the proceeds will be used to purchase the ODBs, provided that the availing institution must: Use all or substantially all of the tender offer proceeds to purchase the ODBs or other local or foreign currency debt securities issued by the National Government; Use the tender proceeds to purchase the ODBs within thirty (30) business days from the date it receives the cash; Disclose the following information to the SEC within ten (10) days from the settlement of the ODBs: i.) the date of the tender for cash and the purchase of the ODBs; ii.) the amounts of the ROP Bonds tendered and ODBs purchased and; iii.) the amount of the institution s total HTM portfolio before and after the subject transaction; Not recognize Day 1 profit or loss from the tender offer. Any gains or losses shall be amortrized over the term of the ODBs; The ODBs must be classified as Held-to-Maturity investments; The basis for the preparation of the financial statements shall not be the Philippines Financial Reporting Standards (PFRS). It should be in the prescribed financial reporting framework for entities which are given relief from certain requirements of the full PFRS.This basis of financial reporting shall be adopted by the availing entity until such time that the ground for its coverage under the tainiting rule of PAS 39 is no longer present. 13. Can the Bonds be used as collateral for loans and be exempt from SBL and DOSRI limits? The Bonds can be used as collateral for loans and are exempt from the SBL and DOSRI limits. (See General Banking Law Section 35& 36; and Manual of Regulations for Banks Section X303(e) & X330.1.) 14. How will the Bonds be offered and priced? Who can participate in the primary issuance? In the primary offering, the Bonds will be offered via a Notice of Offering to Government Securities Eligible Dealers ( GSEDs ) through the Automatic Debt Auction Processing System ( ADAPS ) of the BTr. The Bonds will be priced via a Dutch Auction similar to its Peso Government Bond issuances. The Dutch Auction provides the Issuer with the most transparent pricing process. Eligible subscribers who do not have a GSED license may bid through any GSED of their choice. 15. What will be the pricing benchmark? The Bonds will be priced against the relevant benchmark ROP US$ Global Bond. 16. What are the eligibilities of the Bonds? The Bonds will be eligible as insurance reserves, judicial and performance bonds and foreign currency cover for FCDU liabilities. (Section 73 of the Manual of Regulations on Foreign Exchange Transactions) 3

4 17. Will the Bonds be registered in the Philippine SEC? As a government security, the Bonds are exempt from registration with the SEC (SRC rule 9.2). 18. Will the Bonds be rated by a rating agency? Being exempt from Philippine SEC registration, the Bonds are exempt locally from a rating requirement 19. Who will be the registry and paying agent? The registry and paying agent will be the BTR-ROSS (Registry of Scripless Securities). 4

5 II. Secondary Market Trading and Tax Tracking Enrolment 1. Do investors need a US$ bank account for the Bonds? Yes, investors must nominate US$ bank account. Coupon and principal payment will be coursed through said nominated account. 2. Is there a liquidity mechanism for the Bonds? The Bonds will be listed in the Philippine Dealing and Exchange System. Once listed, holders have the opportunity to buy and sell the Bonds through their brokers/dealers. Trading of the Bonds will be settled on edvp basis via PDDTS through the nominated settlement bank of the holders. 3. Will the issue allow bid-through arrangements wherein transfers from GSEDs to non-gseds on issue date is still considered a primary sale? Yes. 4. Can OTC transactions be captured by the tax-tracking system? Off-exchange transfers can be captured by the tax-tracking system provided that transfers are settled in the tax-tracked RoSS accounts. 5. Can you name the accredited banks of PDEx? The PDS registered cash settlement banks are: Allied Banking Corp Banco de Oro Unibank, Inc Bank of Commerce Bank of the Philippine Islands Development Bank of the Philippines East West Banking Corporation Land Bank of the Philippines Metropolitan Bank and Trust Co. Philippine National Bank Rizal Commercial Banking Corporation Security Bank Corporation United Coconut Planters Bank China Banking Corporation Hongkong Shanghai Banking Corporation Standard Chartered Bank 6. Can voice brokers provide quotes? Voice brokers can provide the quotes of the clients they are representing 7. What are the fees involved in trading of the Bonds? The Exchanges charges a matching fee of US$25.00 per million per annum both sides if the tenor of the security is one (1) year or less (US$25.00 * number of days remaining / 360 days * FV/1,000,000). A flat fee of US$25.00 per million is charged both sides if the tenor is more than one (1) year. (Fee currency is the same as the currency of the security). 5

6 See Annex A for a summary of fees. 8. Why are the Bonds hosted under the CAAC platform if tax is assumed by the Republic? The Bonds will be traded across tax categories hence the Bonds have to be tracked for the BTr to assume the appropriate final withholding tax. The CAAC performs the function of tax-tracking so it can provide BTr the correct amount of tax it should remit to BIR for every coupon period. 9. Will the On-Shore Dollar Bonds be traded in price or yield terms? The quoting convention shall be based on Price, similar to how the RoPs are quoted in the secondary market. 10. Given the potential numerous intra-day trading, how will banks validate that the tax assumed by Republic matches to each corresponding transaction executed by our traders? The PDS tracking system provides a report everyday covering all intraday trades that a trader makes. Traders can use this report to double check PDS calculation. These reports will be available all the way to coupon date which again the trader can use to verify PDS calculation on the amount of final withholding tax that the Republic will assume. 11. Can you discuss the process of transfer or settlement during the Closed Period? During the period of 3 Business Days before the due date of any coupon or redemption payment of principal, no Bondholder may require the transfer or settlement of trades of any Bonds registered in the Registrar. There can still be trades done within the Closed Period, but settlement of those trades can only be done on a trading day after the coupon payment date. 12. What is a Public Investor Code (PIC)? How is it relevant to the trade? The PIC refers to the Investor Code that a trading participant (TP), i.e., a dealer or broker, associates with the Securities Account for Tax Tracking (SATT) and cash settlement account of a sponsored investor and that such investor code is correctly entered as part of the details of each trade. Dealers should also assign a PIC for its proprietary account. 13. How can one obtain a PIC? For sponsored client account, the PIC is provided for by the sponsoring dealer or broker. PIC for the dealer s proprietary account is provided for by itself. At least a day before trade date, PIC must be enrolled by the dealer or broker in the clearing and settlement system (edvp). 14. What are PIC-related scenarios that may occur during a trade? What are their consequences and how can they be mitigated? If a trader enters a wrong PIC and the system does not recognize the PIC? The system (trade blotter) will classify the trade with the wrong/invalid PIC and place this in the unprocessed folder that provides a blinking indicator to the buyer/seller counterparties that the PIC has to be corrected. Once the correct / valid has been inputted, the trade will proceed for authorization (edvp system) for the buyer/seller s settlement officer to authorize for settlement. 6

7 If a trader enters a system-recognized PIC (client X s PIC) but meant to have entered a different PIC (client Y s PIC)? If the correct or valid PIC is entered, i.e., the system recognizes it that it was enrolled by the broker/dealer entering the trade, the trade will proceed for authorization regardless if the PIC entered is for the correct PIC ordering client. If the erroneous PIC is detected by the settlement officer prior to authorization, the trade can be cancelled at the trading platform to prevent the trade from settling. The buyer / seller counterparties then re-input the trade, still time with the correct PIC. For any further questions on the Onshore Dollar Bonds, please contact the following: HOTLINE CONTACTS Land Bank of the Philippines Name Charmaine Fernando Jen Cabael Ning Ireso Sophia Fuellas Adelfa Masacupan Pia Bustos Contact Number local / / First Metro Investment Corporation Jose Ramon Z. Canillas Percival C. Peña Bernice Joyce E. Nobleza Russ Vasilius R. Toribio Jamel R. Cruz local local 152 7

8 ANNEX A Summary of PDS Fees 8