PFIs price financial products according to risk perceptions. Considering that the LGUGC guarantee mitigates, if not totally eliminates, the borrower credit risk, guaranteed borrowers will then be categorized as lower risks and therefore be offered prime or at least, competitive rates. The interest cost savings that will be realized by the borrower can amply cover the LGUGC guarantee cost.

LGUGC subjects the LGU to its internal LGU credit screening and rating system that is designed according to international rating standards. Under the system, LGUs are reviewed and assigned scores on demographics, management, political and financial factors, among others. The overall score is then given an equivalent alpha rating (AAA, AA, A, BA, B or C), which in turn has an equivalent guarantee fee. Other borrowers, on the other hand, are being evaluated through the Borrower Risk Rating System where the borrower’s financial, business, management and technical risks are identified and assigned points. The total score will be given an equivalent credit risk rating (Excellent, Above Average, Average, Below Average and Poor) based on a scale of points. To arrive at the final guarantee fee to be charged to the borrower, LGUGC factors in the project and term of exposure risks.

LGUGC typically collects its fee one year in advance. For some LGU bond issues, the guarantee fees for the first two years are paid front-end to coincide with the construction phase, while those for the third year onwards are paid annually, also one year in advance. bernie cruz: sir yan na yung answer sa quiestion?

LGUGC’s guarantee agreement states clearly that LGUGC’s guarantee does not have the benefit of excussion. This means that once a call is made, LGUGC honors the claim and will arrange the remedy later or go to court for any question regarding the claim. There is no provision for escalation in LGU bonds, thus, the investors/bondholders will always be kept whole even during a “default” situation.

PFIs operate in an “uneven” playing field. They do not have the LGU deposits. The most they hold is an assignment on the deposits maintained with GFIs and enforceable only when a default occurs. Based on current policy, the LGUGC is not inclined to entertain LGU guarantee applications where an assignment on the IRA deposit is not part of the collateral pool. We emphasize, however, that the projects guaranteed by LGUGC are revenue-generating and therefore not primarily dependent on IRA as a source of debt repayment.

The 1991 Local Government Code provides that LGU can only issue bonds for revenue-generating and self-liquidating projects. However, LGUGC will entertain guarantee applications for non-revenue generating projects for direct loan transactions on a credit risk sharing basis with the PFIs.

The guarantee business is a leverage business. Since a guarantee company’s liability becomes real only when there is a default and claim on its guarantee, the company can theoretically guarantee up to the inverse of its default rate. For example, a guarantor with a guarantee fund of P500 million and a default rate of 5% can guarantee up to 20 times of its fund or P10 billion. This assumes that a separate fund is used for operations. With zero default rate since its inception, LGUGC currently applies a “guide” gearing or leverage ratio of 10 times its guarantee fund or a prudential limit of 10:1. This translates to a maximum outstanding guarantee of P4.5 billion given LGUGC’s current guarantee fund of P455 million. In the absence of a default track record considering that it is a new company, LGUGC currently applies a “guide” gearing or leverage ratio of 10 times its guarantee fund or a prudential limit of 10:1. This translates to a maximum outstanding guarantee of P4 billion given LGUGC’s current guarantee fund of P420 million.

First, a call on LGUGC guarantee does not accelerate payment of the entire outstanding obligation. When a call is made, LGUGC’s commitment is to honor each debt service obligation as this becomes due. This policy protects the LGUGC guarantee fund from an abrupt erosion with only a few calls, and allows the corporation the time to cure the defaulted account without having to pay off the entire obligation even when this has not matured. Second, LGUGC has established a trust fund with DBP to be accessed only for guarantee claims payment. The trust agreement restricts withdrawals from the fund, which LGUGC calls the “Guarantee Fund”.

First and foremost, the LGU credits are all supported by an IRA deposit assignment, which is the strongest collateral one can get from an LGU. For other borrowers, there is an assignment of a reserve fund carved from the monthly gross revenues of the borrower. Secondly, there is an assignment of project assets and revenues. Lastly, the management of LGUGC provides a buffer in its leverage ratio.

LGUGC does not intend to rely on its current capital. It will invite other local or foreign institutions with potential for business synergy to invest in LGUGC. It can also work on the expansion of the LGUGC-USAID Co-guarantee Agreement under which the USAID re-insures up to 40% of LGUGC’s risks on an enrolled water project, or identify similar arrangements with other donor agencies and/or insurance companies. In the near future, LGUGC will have itself rated. It will also have guaranteed qualified LGU bonds eventually listed in the Philippine Dealing and Exchange Corporation (PDEX).