Definition of Terms

Buyout - the acquisition of a controlling interest in a company and is used

synonymously with the term acquisition. If the stake is bought by the firm’s
management, it is known as a management buyout and if high levels of debt are
used to fund the buyout, it is called a leveraged buyout. Buyouts often occur
when a company is going private.

Capital stock is the amount of common and preferred shares that a company is authorized to
issue—recorded on the balance sheet under shareholders' equity. The amount of capital
stock is the maximum amount of shares that a company can ever have outstanding.

The difference between stocks and bonds is that stocks are shares in the ownership of a
business, while bonds are a form of debt that the issuing entity promises to repay at some point
in the future. A balance between the two types of funding must be achieved to ensure a proper
capital structure for a business.

Securitization refers to the process of converting debt (assets, usually illiquid assets) into
securities, which are then bought and sold in the financial markets. If you notice, the first line
calls debt as an asset. This is because debt is a liability for the borrower, but for the lender, it is
an asset. One can trade securities (created from securitization) similar to stocks, bonds and
futures contracts.

In simple words, securitization is a process where a financial company combines several of

its assets into consolidated financial instrument or securities. Then, financial companies issue
these securities to the investors, who earn interest.

We also know such securities by the name asset-backed security (ABS), or collateralized debt
obligation (CDO) or also mortgage-backed securities (MBS). ABS usually pools different assets
like a credit card, auto loans and more, while MBS pools mortgage only.

An illiquid asset is one that can't be turned into cash quickly or without losing substantial value.
For example, a shareholding in a private (unlisted) company is an illiquid asset, whereas
shares in a company listed on a major stock exchange have much greater liquidity.

Internal Rate of Return (IRR)

Discount rate that would make a project’s NPV equal zero.

Expected Equity IRR

Expected return of an investor when he/she invested in the project.

15% - A premium over equity IRR is given when the latter is below market rate such that
without the premium, no investor will invest in the project.

Asset-backed bonds, also known as asset-backed securities, are secured by loans or by

money owed to a company for merchandise or services purchased on credit.

Understanding Asset-Backed Securities

Asset-backed securities are essentially pools of smaller assets held by various

financial institutions, such as banks, credit unions, and other lenders. Most of
the assets are loans provided to individuals in the form of mortgages, credit
card debt, or auto loans. Since the loans provide the lender with interest and
principal payments, they are assets on the lender’s balance sheet.

However, the assets are often small and illiquid and cannot be sold to
investors individually. Therefore, financial institutions will pool multiple assets
together through a process known as securitization. The process results in new
securities with a diversified risk profile, as each security only contains a fraction
of the total pool of underlying assets. The interest and principal payments on
the assets are also passed on to the investor, as well as the risk.

A special-purpose entity is a legal entity created to fulfill narrow, specific or temporary objectives.
SPEs are typically used by companies to isolate the firm from financial risk. A formal definition is
"The Special Purpose Entity is a fenced organization having limited predefined purposes and a legal
personality".

*ERPs are from direct obligations of DOTC

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Sources Of Finance
Securitization – Meaning, Process, Advantage And
Disadvantages
Securitization refers to the process of converting debt (assets, usually illiquid assets) into
securities, which are then bought and sold in the financial markets. If you notice, the first line
calls debt as an asset. This is because debt is a liability for the borrower, but for the lender, it is
an asset. One can trade securities (created from securitization) similar to stocks, bonds and
futures contracts.
In simple words, securitization is a process where a financial company combines several of
its assets into consolidated financial instrument or securities. Then, financial companies issue
these securities to the investors, who earn interest.
We also know such securities by the name asset-backed security (ABS), or collateralized debt
obligation (CDO) or also mortgage-backed securities (MBS). ABS usually pools different assets
like a credit card, auto loans and more, while MBS pools mortgage only.
 Table of Contents [show]
WHAT’S THE PROCESS OF SECURITIZATION?
As said before, banks or financial institutions securitize primarily illiquid assets. One can easily
convert a liquid asset into cash, for example, gold. On the other hand, assets that can’t be easily
converted to cash are illiquid assets. Real estate is a good example of it. Finding a buyer for a
property is not always an easy task.
Similarly, mortgages are valuable assets but are mostly illiquid. Mortgages are usually backed by
real estate, which again is illiquid. Though mortgages offer a healthy return in the form of the
homeowner paying interest, it can take many years (as long as 30 years) to realize it in full. Thus,
to realize the full potential of these illiquid assets, banks or financial institutions covert
mortgages into liquid assets via securitization.

Overview –

De privatization of the MRT

The current BLT agreement constrains government-initiated plans to expand the railway by granting
MRTC the “right of first refusal” on expansion projects. In fact, MPIC had previously blocked the
government’s plan to modernize MRT3, asserting it holds the legal right to the railway expansion.

President Aquino issued an executive order authorizing government buyout of the private interest in
Metro Rail Transit-Line 3 (MRT-3), which is currently owned by private concessionaire Metro Rail Transit
Corp. (MRTC). This is intended to reduce the subsidy the government must now provide, and allow the
government to undertake the much-needed railway capacity expansion.

The EO calls for the termination of the Build-Lease-Transfer (BLT) contract which binds the government
to pay MRTC huge fees every year

Meanwhile, Metro Pacifi c Investments Corp. (MPIC) holds the remaining 20% economic rights but
through its contract effectively controls the MRTC. The EO directs the relevant agencies to implement
the EVBO either through an equity purchase or an asset purchase (see box on EO 126). The buyout is
estimated to cost about $1 billion

Gov’t opts to de-privatize MRT-3 President Aquino issued an executive order authorizing government
buyout of the private interest in Metro Rail Transit-Line 3 (MRT-3), which is currently owned by private
concessionaire Metro Rail Transit Corp. (MRTC). This is intended to reduce the subsidy the government
must now provide, and allow the government to undertake the much-needed railway capacity
expansion. Implementing details have yet to be fi nalized. The EO calls for the termination of the Build-
Lease-Transfer (BLT) contract which binds the government to pay MRTC huge fees every year (see box
on MRT-3 contract covenants). In 2010, government obligations to MRTC amounted to P7.9 billion, the
bulk of which was spent on the guaranteed ROI (see box on MRT-3 subsidy breakdown); it also included
subsidies for MRT-3’s maintenance costs, debt guaranteed payments, insurance expenses, etc. At
present, government’s obligations to MRTC already cover all costs for operations and maintenance
(O&M). With the contract termination, the government will still shell out funds to pay for O&M, but it
will no longer have to pay MRTC its guaranteed annual 15% ROI. The DOTC will eventually privatize MRT-
3 operations-and-maintenance once the buyout is completed. On February 26, Pres. Aquino signed
Executive Order (EO) 126 directing the Departments of Finance (DOF) and Transportation (DOTC), the
Development Bank of the Philippines (DBP) and the Land Bank of the Philippines (LBP) to implement an
equity value buyout (EVBO) of MRTC, concessionaire of MRT-3. The government, through the DBP and
LBP, currently owns some 80% economic interest in MRTC, but does not have voting rights. Meanwhile,
Metro Pacifi c Investments Corp. (MPIC) holds the remaining 20% economic rights but through its
contract effectively controls the MRTC. The EO directs the relevant agencies to implement the EVBO
either through an equity purchase or an asset purchase (see box on EO 126). The buyout is estimated to
cost about $1 billion. Finance Sec. Cesar Purisima gave assurance that he sees no funding constraints
given the country’s strong fi scal position. He elaborated that the buyout could be funded through the
national budget, or by taking out funds from governmentowned and -controlled corporations, or
through borrowings. The buyout is intended to a) end a pending arbitration case that the MRTC fi led
with the Singapore Arbitration Committee against the Philippines over the government’s failure to pay
on time MRTC’s guaranteed annual 15% return on investment (ROI); b) manage the fi nancial burden
imposed on the government by the MRT-3 contract; and c) allow the DBP and LBP to divest of its
interests in MRT-3 in accordance with prudential regulations of the central bank barring state-owned
banks from holding non-allied investments. Philippine ANALYST April 2013 54 INFRASTRUCTURE
EXECUTIVE ORDER 126 Components of the Equity Value Buyout (EVBO) of Metro Rail Transit Corp.
(MRTC) a) An equity purchase which would involve all outstanding shares of stock and other securities
issued by MRTC, or an asset purchase of all the rights, titles and interests of MRTC in MRT-3 (Price has
yet to be determined, but estimated at $1 billion); b) Execution of Compromise Agreement on the
pending arbitration case between the government and MRTC “without admission of fault on the part of
the Philippines;” c) Government’s settlement of MRTC’s local tax liabilities, which are shouldered by the
state under the Build-Lease-Transfer (BLT) agreement; and d) Termination of the BLT Agreement
SEQUENCE OF EVENTS: METRO RAIL TRANSIT LINE 3 (MRT-3) DATE EVENT 1997 The government,
through the Department of Transportation and Communications (DOTC), entered into a build-
leasetransfer (BLT) contract with Metro Rail Transit Corp. (MRTC) for the MRT-3 project. MRTC was
guaranteed a 15% annual return on equity (ROI) via lease payments of the government to the
consortium. 2000 MRT-3 began full operations. 2003 Some MRTC shareholders securitized their shares
in the guaranteed lease payments through the issuance of bonds and preferred shares (referred to as
the economic rights). December 2008 The government, through the Land Bank of the Philippines and
the Development Bank of the Philippines, acquired $800 million worth of securitized shares in MRTC.
January 2009 MRTC fi led an arbitration case against the Government of the Philippines before the
Arbitration Committee in Singapore over the Philippines’ failure to pay MRTC’s guaranteed ROI on time.
November 2010 Metro Pacifi c Investments Corp. (MPIC) entered into a “cooperation agreement” with
Fil-Estate Corp. for the latter’s 18% stake in MRTC. January 2011 MPIC submitted its original proposal to
the DOTC and Dept. of Finance for the expansion of MRT-3 pursuant to the BLT contract awarded to
MRTC. February 2011 MPIC revealed that its interest in MRTC had risen to 48% through an agreement
with Anglo-Philippine Holdings Corp. and DBH Inc. January 2012 San Miguel Corp. submitted a
competing proposal to expand the MRT-3. August 2012 MPIC submitted to DOTC its amended
“unsolicited proposal” to expand MRT-3. 28 February 2013 Pres. Aquino signed Executive Order 126
authorizing government buyout of MRTC. Sources: MRT-3 website; DOTC; NEDA; PPP Center
presentation on “The MRT 3 Contract” by Atty. Helena Tolentino, June 2012; MPIC 2011 Annual Report;
Philippine Alert March 2009; Executive Order 126; Press statements Source: PPP Center presentation on
“The MRT 3 Contract” by Atty. Helena Tolentino, June 2012 Philippine ANALYST April 2013
INFRASTRUCTURE 55 THE MRT-3 CONTRACT MRT-3 CONTRACT COVENANTS • MRTC owns the MRT-3
system, but DOTC operates it and pays regular lease payments to MRTC. MRTC  To build MRT-3 and
procure spare parts  To maintain and guarantee availability of trains (by securing maintenance
provider) Government  To operate the MRT-3  To collect fares  To pay MRTC regular lease
payments, which cover the fi xed and guaranteed 15% ROI, debt guaranteed payments, insurance
expenses, and all expenses related to the construction, operations and maintenance Sources: PPP
Center presentation on “The MRT 3 Contract” by Atty. Helena Tolentino, June 2012, DOTC, press
statements MRT-3 SUBSIDY (BREAKDOWN, 2010) 2010 : P7.87 billion  P5.29 billion for Equity Rental
Payments or payments for the guaranteed annual 15% ROI to MRTC  P1.18 billion for maintenance
costs  P1.15 billion for debt guaranteed payments  P207 million for insurance expenses  P34
million for other fees and costs The EO also directs the DOTC and the Offi ce of the Solicitor General to
execute a Compromise Agreement for the arbitration case with the MRTC “without admission of fault on
the part of the Philippines”. More importantly, the buyout would allow the government to undertake
the much-needed capacity expansion of MRT-3. The current BLT agreement constrains government-
initiated plans to expand the railway by granting MRTC the “right of fi rst refusal” on expansion projects.
In fact, MPIC had previously blocked the government’s plan to modernize MRT3, asserting it holds the
legal right to the railway expansion. MPIC at that time and San Miguel Corp. later on have offered to
expand the railway. MPIC had sought government clearance for its proposal to undertake a $300-million
capacity expansion of MRT-3 and to purchase remaining MRTC bonds and equity for $350 million. SMC
offered to purchase new rail cars on the condition that incremental revenues will go to SMC. However,
the DOTC did not reach a decision on these proposals. It later announced that proposals to expand the
railway will no longer be considered. It added, though, that the MRT-3 O&M will still be privatized
eventually, once the government gains full control of MRTC through the buyout. MPIC has committed
that it will cooperate with the government’s plan to de-privatize MRTC. At present, there is no timetable
for the buyout. Sec. Purisima clarified that the EO only grants authority to execute the buyout, but
details still have to be mapped out. The administration is currently conducting discussions to thresh out
the implementing details of the EO. The MRT-3 was originally designed to carry 350,000 passengers per
day, but it has been operating beyond capacity since 2006. In 2011, MRT-3 ridership was pegged at
435,000 per day

In 2003 the corporate owners of the MRT issued asset-backed bonds for its future ERPs (through SPV,
MRT III Funding Corporation, Ltd.
In view of the desire of the Philippine Government to (i) provide a more efficient and publicly-safe
MRT Line 3 by introducing capacity expansion projects; (ii) put an end to the arbitration case filed by
MRTC against the Philippines; and, (iii) manage the financial burden on the part of the Government
imposed by the BLT Agreement, EXECUTIVE ORDER No. 126 has been issued by Pres. Benigno
“Noynoy” S. Aquino III authorizing the implementation of the equity value buyout (EVB) of
the Metro Rail Transit Corporation (MRTC), the concessionaire of MRT-3 and prescribing
guidelines therefor

The ultimate goal of the EO is to terminate the existing BLT agreement by releasing $200M to buyout MRTC and
$800M to buyout Land Bank and DBP.

The EO calls for the termination of the Build-Lease-Transfer (BLT) contract which binds the government
to pay MRTC huge fees every year.

Land Bank of the Philippines (LBP) and Development Bank of the Philippines (DBP)

Issues: No GFI Representation in the MRTC Board – Buyout would not be possible without
representation of GIF in the Board

Bond Structure of MRTC

DBP/Landbank – 78%

Other 22%

November 2008: Land Bank approved the purchase of MRTC interests in the form of:

*Unsecuritized Equity Rental Payments

*Preference Shares

*Notes

DBP’s Investment in MRTC as of December 31, 2020

MRT Bonds –

Preferred Shares

Unsecuritized Shares

Total –
Background:

Build – Lease – Transfer (BLT) Agreement

Financing of MRT:

Equity: USD 190 MIllion

Financing: USD 465 Million

 Japan Export Import Bank (JExIm)

 Bank of Tokyo – Mitsubishi
 Postal Bank of the Czech Republic
 Czech Export Credit Agency

Other Commercial Banks

Main Covenant:

MRTC DOTC
Build the MRT System Operate the MRT System and shoulder the
operating cause (i.e. personnel and overhead
costs)
Maintain and Guarantee availability of Trains Pay the MRTC shareholders 15% IRR (Internal
Rate of Return) via equity rental payment (“ERP”)
Procure Spare parts Collect fares
Put up equity of USD 190 MIllion Shoulder local taxes and other expenses
Guarantee/pay obligations to Jexim and other
FCDU lenders amounting to USD 465 Million

Original Investors of MRT

MRT Holdings 1 – 84.9 Fil Estate Management – 12.65 Others- 2.5

Ayala – 23

FEL – 18.6

Anglo – 18.6

Rail Co – 18.6

Sheridan – 16

DBH Realty 5
Economic Interests in MRTC

MRT Holdings III

Dividends for 25 Years

Goldman Sachs

Elliot Holdings

DBP/Landbank