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Primer on BahayBonds NHMFC's maiden Securitization issue I. BACKGROUNDER AND RATIONALE The development of a Secondary Housing Mortgage Market in the Philippines is one of the current Administration’s key economic goals. With the passage of the Securitization Law (R.A. No. 9267) establishing a framework for Secondary Mortgage Institutions (SMI’s) in the country, the infrastructure is finally in place to move forward. The National Home Mortgage Finance Corporation (NHMFC) is the main government home mortgage institution created in 1977 under P.D. No. 1267. NHMFC was established with the primary purpose of developing and providing a secondary market for home mortgages granted by public and/or private home financing institutions. It utilizes long-term funds provided by the Social Security System (SSS), the Government Service Insurance System (GSIS) and the Home Development Mutual Fund (HDMF) to purchase mortgages originated by both public and private institutions that are within government-approved guidelines. NHMFC is also charged with the development of a system that will attract private institutional funds into long-term housing mortgages. THE UHLP AND THE NPL LOAN SALE In 1986, E.O. No. 90 was issued by President Corazon C. Aquino to implement the low-income housing production of Government. Under E.O. 90, NHMFC developed and managed the Unified Home Lending Program (UHLP) from 1987 to 1996, and provided mortgage financing to approximately 220,000 homes. SSS, GSIS and HDMF (the Funders) funded UHLP by issuing loans to NHMFC totaling Php42 Billion. SSS accounted for Php30.1B, GSIS for Php6.5B, and HDMF for Php5.5B of UHLP funding, and re-lent by NHMFC to the members of each fund. From 1988 to November 2003 (date of Approval of Restructuring Agreement), NHMFC paid the Funders some Php40.4B. Despite such payments, present obligations with the Funders increased to Php53.2B from the original amount borrowed of Php42B (due to annual interest and penalties accrued by the Funders). To address the increasing “gap” between UHLP cash collections and Funder loan accrual balances, NHMFC (with the support of the Department of Finance [DOF] ) conducted a competitive bidding process to retain the services of a Financial Advisor (FA). The mandate of the FA was to help develop and implement a disposition strategy and restructuring scheme for the UHLP Portfolio. The UHLP Portfolio Disposition Strategy segregates the UHLP assets into three loan tranches: 1) Highly Delinquent Loans, 2) Moderately Delinquent Loans and 3) Low Delinquency Loans along with the implementation of the following tasks: 1) Dispose of Borrower Loans in the Highly Delinquent Tranche (2004); 2) Restructure Borrower Loans in the Moderately Delinquent Tranche (2004); 3) Securitize Borrower Loans in the Low Delinquency Tranche (2004/2005); 4) Restructure NHMFC’s Loans with SSS and HDMF (2003); and Dacion NHMFC’s UHLP Loans allocated to GSIS (2002). In June 2003, NHMFC formed a Bids and Awards Committee (BAC) to oversee the disposition of its High Del Loan Tranche. The BAC awarded to DB Global Opportunities the sale of NHMFC’s High Del Loans: Approximately 52,000 High Del loans with an OPB of Php12 Billion and total amount due of Php30 Billion (principal and interest, excluding penalties). Estimated nominal value of the underlying collateral was only about Php20 Billion. The NPL Sale used a joint venture structure that maximizes the overall cash recovery to NHMFC and its Funders. In addition, the NPL Sale Transaction Structure also provided the following:
Further, as part of the whole disposition strategy and in order to provide fair and ample restructuring opportunities to its Borrowers, NHMFC imposed on the Purchaser (under the JV Structure): to allow the Borrowers to restructure their loans under same terms available from NHMFC for 6 months following the transfer of the High Del Loans. In addition, NHMFC also enjoined the Purchaser to offer other restructuring schemes that may even be more attractive to the Borrowers (i.e., schemes that provide for condonation of Borrower interest and penalty/ies that NHMFC would be precluded from offering). This requirement provided added protection to the Borrowers and transferred the restructuring burden onto the Purchaser. At the same time, it allowed NHMFC and its Funders to maximize the disposition proceeds from the Highly Delinquent Loans. Finally, this transaction signaled to the financial community the country’s emergence as a player in the emerging NPL market in the Asian Region. RATIONALE FOR THE NHMFC MAIDEN ISSUE In view of all these actions and starting 2004, NHMFC posted positive net incomes in its balance sheet. Also, in 2006, the Corporation submitted and received approval of its Rationalization Program. In 2007, NHMFC implemented the corporate-wide streamlining and reconfiguration of its organization. Effective middle of 2007, the new NHMFC organization was in place and is now ready to fulfill its original mandate. The year 2007 was a transition year for NHMFC. The Corporation embarked on an aggressive capability-building program for its officers and staff. This program aimed to fully equip its manpower complement with the necessary tools and know-how to undertake the requirements of securitization. Further in the last quarter of 2007, the Corporation hired a Financial Advisor (Ernst & Young Transaction Advisory Services, Inc. or EY-TASI) to assist the Corporation in its maiden securitization. NHMFC has now operationalized its primary mandate (pursuant to P.D. No. 1267) and has implemented an SMI Program that will serve as the foundation for the development of a Securitization Market in the Philippines and encourage the formation of additional SMIs within the private sector (consistent with the Securitization Law). Securitization increases liquidity, frees up capital, reallocates risks and as a result, reduces the cost of funds for lenders and borrowers. Such benefits have been clearly demonstrated in the United States and in other countries where similar market mechanisms have been implemented. The introduction of a housing securitization market in the Philippines will produce far-reaching social and economic benefits by significantly increasing housing affordability for the general population. Increased housing affordability will, in turn, provide a major incentive for growth in the housing sector and the industries related to it, thereby contributing to the sustained growth of the economy. In summary, over the past five years, the NHMFC has embarked on a massive financial re-engineering/ rehabilitation program where it re-engineered itself: fixing its existing collection program and infrastructure, and cleaning up its balance sheet through the Restructuring of its Loan with the Funders (SSS, GSIS and HDMF), the disposition of its non-performing loans through public bidding, the spin-off of programs such as the Community Mortgage Program (CMP) to a subsidiary, namely the Social Housing Finance Corporation (SHFC), in order to fully focus on performing its original mandate of developing the secondary mortgage market in the Philippines. Mortgage/Asset-Backed securitization provides a cost-effective way for the government to support economic development by leveraging its contribution to housing through the use of private capital and risk sharing. By providing the legal framework for securitization along with selective forms of credit enhancement (such as government guarantees), the government can offer powerful incentives for private sector participation and help mobilize both domestic and international capital for housing development. In order to provide the government with this much needed tool to stimulate economic growth and housing development, NHMFC launched its maiden securitization issue last March 23, 2009 at The Conservatory of the Peninsula Manila. Using more than 12,000 prime residential mortgage loans, the NHMFC issued PhP 2.06B worth of Asset-Backed securities called BahayBonds. These are the best quality loans in NHMFC’s UHLP portfolio. BahayBonds, which are tax exempt, consist of two (2) classes of Notes. The Senior Notes, rated AA by PhilRatings have been bought by QUIBS (Qualified Institutional Investors/Banks). The Sub-Notes, rated BBB+ by PhilRatings, have been retained by NHMFC. Home Guaranty Corporation provided a cash flow guarantee for the asset pool/loans. The market reception to the BahayBonds was very good as the bonds were twice oversubscribed. In fact, up till now, more investors have asked about the next issue as there seems to be a strong appetite for NHMFC issuances. Upon completion of the maiden securitization issue (using its own UHLP Portfolio to build interest and awareness), NHMFC, along with its securitization partners from the private sector will pursue the development of a pipeline of additional mortgage securitization transactions leading to a self-sustaining MSM in the Philippines. The SMI Program as envisioned shall provide for the issuance of small-tranched asset-backed securities (at the initial stages) and is expected to generate and recycle funds for housing. This is done as the NHMFC sets the underwriting guidelines and servicing standards for housing mortgages/CTS for securitization. The regulatory framework for the buying and selling of these asset-backed securities are well defined in the Securitization Law. As we develop the standards and the market for these kinds of financial instruments, then it is also highly likely that standards for origination of housing loans shall improve as well. II. THE SECURITIZATION STRUCTURE FOR BAHAYBONDS Under the structure, NHMFC sold a pool of housing loans to the Special Purpose Trust (SPT) at par and without recourse, as required under the Securitization Law of 2004. Simultaneously, the SPT raised funds by issuing Notes worth Php2.06 Billion. The loans that would be transferred to the SPT would serve as the underlying collateral for the Notes. The Structure for this landmark transaction is attached for reference as Schedule 1. Schedule 1 The structure is illustrated as follows:  The Notes were divided into two (2) classes: Senior and Subordinated.
The payments from borrowers to the originator are processed by a primary servicer, which will be a dedicated group within NHMFC (the “Servicer”). The Servicer passes the interest, principal and fee payments from the borrowers to the SPT. The SPT in turn pays tax, senior fees and expenses, pre-defined interest and principal repayment to the investors, servicing fee to the Servicer and any other fees according to the terms of the Transaction. NHMFC may also accrue the Excess Spread, i.e., the difference between the assets’ revenues and all SPT costs. When the outstanding balance of the Senior Notes fall below 10% of its original size (which is Php200 Million in this Transaction), NHMFC has the option to buy back the remaining assets (including cash) from the SPT as part of a Clean-Up Call option by the Seller/NHMFC. During the on-going servicing activity/process, a sub-servicer may be contracted to increase the collection efficiency and recovery of the delinquent accounts provided that NHMFC shall be responsible for the sub-servicer duties, being the primary Servicer. A back-up servicer may also be identified to service the assets in the event (Servicer Termination Events, as seen in Schedule 1) the primary Servicer is unable to service the SPT, or the Investors exercise their right to remove the Servicer. RATING The Senior Notes were rated by PhilRatings, who examined the legal structure of the Transaction (notably, the True Sale element pursuant to the Securitization Law), the quality of the securitized asset pool and the ability of the Issuer to service the assets as well as the guarantor (HGC) credit. Based on this analysis and the amount of the credit enhancement (and other supporting arrangements, if any), the securities were rated AA and disseminated to the investors. The Subordinated Notes to be held by NHMFC have also been rated BBB+. The Final Term Sheet is presented below. AMORTIZATION AND CREDIT ENHANCEMENTS OF SENIOR NOTES The Transaction Structure has no revolving period. The Senior Notes shall be amortized either using the controlled amortization method (which means, pre-scheduled amortization). The Subordinated Notes shall be amortized only after full amortization of all Senior Notes. Principal payments from the asset pool will be applied towards the principal repayment of the Senior Notes until its outstanding principal reaches 10% of the original size. Losses from the asset pool shall be first covered by the application of the Excess Spread (if any). Remaining uncovered losses shall be applied sequentially in the reverse order of seniority i.e., first to the Subordinated Notes and then to the Senior Notes. Excess Spread can be applied to first cover credit losses before paying interest on the Subordinated Notes. Senior Notes shall carry a cash-flow guarantee from the Home Guaranty Corporation (HGC). The HGC is a government-owned and controlled corporation created in 1950. It is tasked to operate a credit guaranty program in support of government’s efforts to promote home ownership by providing risk guarantees and fiscal incentives for housing credits extended by financing institutions, thereby stimulating the flow of funds from both the government and private sectors for housing and urban development. In this structure, HGC provides full guarantee in the form of debentures that provide for the expected installment payments of the defaulted Assets. The debentures shall pay the full principal component of the expected installment plus interest component of up to 11% p.a. of the defaulted Assets that are allocated to the Php 2.0 Billion Senior Notes. HGC Guaranty will not cover losses of the Assets that are allocated to the Subordinated Notes. The HGC Guarantee payment mechanism as described above can be illustrated as follows:  EARLY AMORTIZATION Upon occurrence of certain events viz. Servicer Termination Event, HGC Guarantee Event, the Transaction shall enter into Early Amortization phase where in the transaction shall be accelerated in order to protect the investors. All cash received from the Assets shall be applied towards covering the SPT costs and covering losses, and the whole of the remaining cash shall be applied towards principal redemption of Senior Notes (pass-through). No payment to the Subordinated Notes shall be made during Early Amortization. III. TERM SHEET a. Final Asset Pool Cut – Key Characteristics Presented hereunder are the key characteristics of the final pool cut:
IV. PARTIES INVOLVED List of All Parties Involved in the Maiden Issue Transaction
V. DOCUMENTS PREPARED
VI. KEY AND IMPORTANT NUMERICAL FACTS: POST-ISSUE SUMMARY A. ASSET POOL - The total number of UHLP accounts used to back up the BahayBonds issuance compliant with the Eligibility Criteria (Prime accounts).
B. PORTFOLIO SIZE OF THE BAHAYBONDS MAIDEN ISSUE – The BahayBonds have two classes: Class A or Senior Notes and Class B or Subordinated Note.
C. PROCEEDS FROM SENIOR NOTES
*New Amortization was effected for March 2009 and has been remitted to Funders last April 3, 2009. RATIONALE OF THE NOTES AND BENEFITS TO THE PHILIPPINE ABS AND MORTGAGE MARKET The issuance of NHMFC Maiden Securitization Issue, herein referred to as the Notes, IS the first public residential mortgage-backed transaction in the country and the second major securitization offering under R.A. 9267 or the Securitization Law. A successful securitization by a government financial institution such as the NHMFC provides diversity and added liquidity to the debt capital markets and would provide a significant boost to the Philippine securitization market. By offering a new asset class to investors, NHMFC would be expanding the investment choices to investors that need access to long-dated and high-quality holdings. We believe that this securitization would be a major step toward the establishment of the secondary mortgage and housing-related ABS market. This would provide a much needed liquidity mechanism to primary mortgage lenders/holders as well as an additional investment opportunity for investors that need to diversify their holdings. NHMFC also intends for the Senior Notes to be listed on PDEX to maximize such liquidity for investors. NHMFC believes that the Notes will make a significant contribution to further development of the Philippine financial markets consistent with the Philippine government’s priority objectives in this regard. The Notes would establish and accelerate development of the secondary mortgage market by introducing a large government issuer and provide the initial security for institutional investors in the interim.
For the month of April, NHMFC as Servicer has remitted the amount of some PhP37 Million to the SPT (1st monthly collection for the securitized accounts) comprising of some PhP34M regular collections of Principal and Interest due for the month and PhP3 Million of full payments. |
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