By Raissa Robles
[I’d like to share this investigative story I wrote for South China Morning Post in 2002, to help shed light on the Peace Bonds controversy. This is how they did it and why they did it.
And if you’re wondering why top banks and businessmen are now supporting the tax breaks given to the Peace Bonds issue, perhaps it’s because it’s not very well-known that the Philippine Business for Social Progress or PBSP now chaired by Manny Pangilinan and whose executive director is Rafael C. Lopa is actually part of CODE-NGO, which benefited from the Peace Bonds.
Were the bonds a good idea to raise money for anti-poverty projects? You be the judge.]
A dead cell phone starts the story of how a non-government organization (NGO) got its hands on over a billion pesos – and triggered a controversy that embroiled the Philippine President in yet another scandal.
When his mobile phone’s battery ran out one day in late February 2001, businessman Cesar Mayo ducked into a hotel to use a pay phone. On his way out, he bumped into a friend, Roberto Guevara, who wanted to know how to raise money fast to help out a childhood friend who was a veteran NGO worker.
From that chance meeting came the idea of a government bond float that was successfully concluded on October 16, 2001.
It enabled the Caucus of Development NGO Networks (CODE-NGO) to gross P1.8 billion – making it the wealthiest NGO in Philippine history.
To get an idea of CODE-NGO’s windfall, consider that the local branches of Deutsche Bank AG and The Chase Manhattan Bank grossed 1.5 billion pesos and 1.089 billion pesos, respectively in the year 2000.
Mayo was a designer of market instruments. His stint at the Federal Reserve Bank of Philadelphia, AIA Capital in Jakarta, Ayala Investments and Jardine Fleming Philippines, had sensitized him to the nuances of the market. To produce such a bond, he sketched out a process that needed the cooperation of key government officials and a private dealer of government securities.
It is that process which bothers critics of the bond float. They say that CODE-NGO took advantage of its connections to President Gloria Macapagal-Arroyo and Finance Secretary Jose Camacho.
The 11-year-old CODE-NGO itself is a respected network with an established track record. Steven Rood, country representative of the United States government-funded Asia Foundation, described it as “the largest network of networks in the Philippines”.
“Fly by night? Absolutely not,” Rood said. “You can see their attempts over the years to come up with a code of ethics and code of conduct for NGOs.”
Among CODE-NGO’s member networks is the Philippine Business for Social Progress (PBSP) whose members in turn are the Philippines’ to 100 corporations which contribute part of their profits to social development.
CODE-NGO has closely stuck to its vision of “social justice, an equitable distribution of wealth, power and access to resources in Philippine society”.
The bond float sprung from that vision. And so did its high-profile role in the 2001 military-backed people power revolt that replaced President Joseph Estrada with Vice-President Gloria Macapagal-Arroyo.
Arroyo appointed CODE-NGO’s previous chair Corazon “Dinky” Soliman to hold the social welfare portfolio. Soliman resigned from CODE-NGO and was replaced by Marissa Camacho-Reyes, who happened to be the finance secretary’s older sister.
Its hugely profitable transaction is now under scrutiny by the Senate finance committee after fellow NGOs slammed it for ”rent-seeking”, “profiteering” and “influence-peddling”.
But its national coordinator Danilo Songco insisted to me that they did everything legally and openly and never involved Secretary Camacho. He lamented the crab mentality:
If we succeeded, what we hoped would happen was, there would be bonds for agrarian reform, for housing, other NGOs could do the same thing.
It was not the first time the government had issued bonds for anti-poverty projects, but it was the first time the proceeds had gone, not to a government agency, but to a private entity.
Bond designer Mayo initially met the idea of a non-profit organization playing the capital market with “extreme skepticism”. But being the chairman and chief executive officer of Capital Advisors for Private Enterprises Expansion (Capex), he was intrigued by the request of Guevara of Seed Capital Ventures to help out Marissa Camacho-Reyes.
Foreign funding for NGOs had been slowly drying up in the last decade, not only locally but also worldwide, Rood said. Which was why, he said:
The Asia foundation and other foreign donors in the past several years have been encouraging civil society groups to diversify funding sources. We’ve been working on how we can raise money domestically and be less dependent on donors.
Still, he found the idea of an NGO tapping the capital markets rather unexpected and unusual.
Initially, Mayo designed a derivative instrument backed on a one-to-one correspondence by 10-year government Treasury Notes (TNs) to be bought from the secondary market. For marketing purposes, these derivatives, to be issued by CODE-NGO, would be called Peace Bonds – short for Poverty Eradication and Alleviation Certificates.
“We were going to purchase TNs at the prevailing market rate and enhance these,” he said.
The sweetener he sought was the Central Bank Monetary Board’s approval for such bonds to be eligible as bank reserves. “We ran into a brick wall. We were told there was no precedent for these eligibilities to be granted to instruments other than government issues.”
Mayo then decided that only government-issued zero coupon bonds would do. But first, Manila’s Bureau of Treasury had to be persuaded to make a maiden offering. National treasurer Sergio Edeza was open to the idea since he himself was considering zeroes.
Security dealers interviewed said the market had little appetite for securities maturing beyond five years. Buyers had to be coaxed into buying them with interest or coupon payments every six months.
Zero coupon bonds paid no interest at all but were sold at a deep discount from face value, which Government paid in full upon maturity.
Problem was, the government accounting method would have to book the entire issue all at once, thus distorting debt service payments. Luckily, this problem was quickly resolved: Commission on Audit Chairman Guillermo Carague was then putting in place a new accounting system that would book big lump sum payments – like those for zeroes – yearly, and accrue these in a bond sinking fund.
CODE-NGO wanted to net over one billion pesos
Because of this stipulation made by CODE-NGO, Mayo, a Math degree holder, calculated backwards. He estimated that given market rates for regular coupon bonds, the NGO would have to buy 35 billion pesos worth of zeroes.
It mattered little that it had little money. Mayo knew that Deutsche Bank-trained Jimmy Panganiban of Rizal Commercial Banking Corporation (RCBC) might be open to a back-to-back deal.
I happened to know he was on the lookout for zeroes” because for one, RCBC owned one of the country’s biggest insurers and leading pre-need group. These types of companies have a voracious appetite for long-dated instruments that they can back up against their endowment policies.
An accredited securities dealer, RCBC would act as CODE-NGO’s agent in buying the bonds from Treasury at a negotiated price, then turn over the bonds to CODE- NGO without demanding payment. CODE-NGO would promptly resell these to an RCBC subsidiary – RCBC Capital – which would pay quickly. Only then would CODE-NGO turn around and pay RCBC.
Mayo believed that for zeroes to be attractive, these had to be enhanced with certain features, for which CODE-NGO lobbied top government officials from March to September last year.
National Treasurer Edeza predicted firestorm over Peace Bonds
Internal Revenue Commissioner Rene Bañez agreed with CODE-NGO that an existing tax provision exempted zeroes from capital gains tax because these matured beyond five years and did not pay interest.
The Monetary Board agreed Peace Bonds dedicated to fighting poverty could be used as bank reserves. This coincided with the Central Bank’s anti-poverty thrust through micro-finance.
Despite such enhancements, Treasurer Edeza balked at a negotiated sale even if CODE-NGO had offered to buy at the Bloomberg wire agency quoted rate for 10-year notes on sale date.
“Mr Edeza”, Songco recalled, “insisted on an auction to be transparent and to discover the real price of zeroes.”
With keen foresight, Mr Edeza had warned them:
We will be attacked by media and Congress.
More bad news came suddenly – Energy Secretary Jose Camacho was handed the finance portfolio, creating a direct conflict of interest situation for him and his older sister, Marissa, then the CODE-NGO chairman.
An auction it had to be. “At this point we stood to lose everything even if we had done all the work, but we had no choice,” Songco said.
Edeza prepared the dealers for the maiden auction by explaining the enhanced zeroes to them a week before. He also decided on a Dutch auction, which meant he would set a uniform rate at which the issue could be sold and all those who bid at or below this rate would win.
With the finance secretary inhibiting himself from the issue, Edeza sought and got President Gloria Macapagal-Arroyo’s approval to issue P50 billion worth of 10-year enhanced zeroes.
On auction day, October 16, 2002, thousands of CODE-NGO members stormed the heavens with prayers.
“We were not at all that confident,” Mayo said.
About a week before the auction, Mayo and Guevara had closely watched the issuance of 10-year Treasury Notes , which they felt Edeza had used to benchmark the zeroes. Their yield to maturity came to 16.5% and the post-tax yield to 13.2%. Even if these paid semi-annual coupon rates, they felt the tax-exempt zeroes would be more attractive to banks because of their reserve eligibility. Which meant they would have to bid even lower than 13.2%
RCBC subdivided its bid for 35 billion pesos into four lots ranging from a low of 12.24% to a high of 12.75%. Another securities dealer offered 13% for the entire 50 billion pesos issue. Following the nature of Dutch auctions, the Treasury chose to award only 35 billion pesos to RCBC but at its highest bid of 12.75%.
How CODE-NGO got a cool P1.8 billion with no money down
That same afternoon, RCBC paid Treasury P10 billion and handed the same amount to CODE-NGO, which passed these on to RCBC Capital. A day or two later, CODE-NGO received P1.8 billion from RCBC Capital.
From out of the P1.8 billion, CODE-NGO then paid back the following:
- RCBC a 2% commission amounting to P239.9 million;
- Mayo was paid P59.98 million; and
- Guevara was paid PP39.59 million
Everybody made money except Marissa and myself.
CODE-NGO got P1.4B and turned this over to a foundation
As for the rest of the money amounting to some P1.4 billion pesos, CODE-NGO turned this over to the Peace and Equity Foundation, a separate entity it had created specifically to handle the money. It is chaired by a Jesuit priest and neither Marissa Camacho-Reyes nor Songco was ever an officer or trustee.
This foundation has reinvested most of the money in five-year and six-year Treasury Notes to serve as a permanent endowment fund “to fight against poverty”. Only interest earnings of P70 million to P100 million pesos yearly were to be used.
Various NGOs have submitted 103 proposals for funding, and 11 of these worth P16 million were approved.
The success of the Peace Bonds has raised much envy and questions on the morality of non-profit organizations making a lot of money.
The Estrada-led opposition has seized on this as a way to get back at President Gloria Macapagal-Arroyo.
But Steve Rood of Asia Foundation said:
At least two international entities concerned with philanthropy have expressed interest in studying this exercise to find out if it’s a good idea. It certainly has aroused interest, not just in the Philippines.