Debt Service Coverage Ratio
Two meetings today, one on Debt Service Coverage Ratio (DSCR) and with the Pre-Qualification Group.
Debt Service Coverage Ratio: Definition
1. In corporate finance, it is the amount of cash flow available to meet annual interest and principal payments on debt, including sinking fund payments.
2. In government finance, it is the amount of export earnings needed to meet annual interest and principal payments on a country's external debts.
3. In personal finance, it is a ratio used by bank loan officers in determining income property loans. This ratio should ideally be over 1. That would mean the property is generating enough income to pay its debt obligations.
In general, it is calculated by: Net Operating Income/Tota Debt Service
Notes:
A DSCR of less than 1 would mean a negative cash flow. A DSCR of say .95 would mean that there is only enough net operating income to cover 95% of annual debt payments. For example, in the context of personal finance, this would mean the borrower would have to delve into their personal funds every month to keep the project afloat. Generally, lenders frown on a negative cash flow, but some allow it if the borrower has strong outside income.
Bond issued below Par
Bond DiscountAmount by which the Market Price of a bond is lower than its Face Value. Outstanding bonds with fixed Coupons go to discounts when market interest rates rise. Discounts are also caused when supply exceeds demand and when a bond's Credit Rating Is reduced. When opposite conditions exist and market price is higher than face value, the difference is termed a bond premium. Premiums also occur when a bond issue with a Call Feature is redeemed prior to maturity and the bondholder is compensated for lost interest.
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Original Issue Discount (OID)The discount from par value at the time a bond or other debt instrument is issued. It is the difference between the stated redemption price at maturity and the issue price.
Investopedia Says: An original issue discount bond is a bond issued at a price below par. The most extreme example of an OID is a zero coupon bond. OID is considered to be a form of interest, so tax issues can get a bit complicated.
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All-in cost computation: Re-offer yield and stated redemption price
Coupon and par value
Daily PSALM Activities 2005
I learned that I will never learn to appreciate what I do if I don't document them. So I gathered all my notes and summarized what I do everyday in the office. Not all, however, are documented. There was a time when there is nothing much to do so there was no motivation to keep a calendar.
I got promoted as Division Manager in May 2005. I chose to keep one staff because the function of our division has always been handled by a partnership. Nonetheless, I plan to add one more so that I can branch out to other activities. ---
28 September 2005 – Drafted letter for RMBSA and ACCRA. E-mailed CALYON on external counsel. Learned that Atty. Magdalena Imperio is the new lawyer of BSP.
29 September 2005 – Asked Dulce to follow-up receipt of BSP of the notarized NP Board Resolution. Drafted uniform guidelines (I am surprised to learn that it was only now that we are able to finalize the uniform. Last year pa pala ito!)
30 September 2005 – Still on the external counsel to opine on the MCA with CALYON. Inquired from PSALM Legal if there is a standard process in availing the services of external counsels. Listed the following transactions that PSALM facilitated for itself and NPC, which are the following: Power Bonds (2005), Nomura (PSALM financing with ADB Guarantee in 2003), ING Zeroes (2004), OPIC (2003), GSI Zeroes (2003), Bear FRNs (2005) and ING Zeroes (2005) and CALYON (2005). Assignments with Debt Transfer Team.
03 October 2005 – RFP Meeting with the Dept. Manager (Gary): Clarify Primary Obligor status of ROP in the guarantee, set meeting with BTr and DOF on the RFP, Board approval on the funding gap. Follow up MB Opinion on ING Zeroes. Debt Transfer.
17 February 2006
Economic tango
By Cielito Habito
Inquirer
Last updated 09:53pm (Mla time) 09/10/2006
Published on page B2 of the September 11, 2006 issue of the Philippine Daily Inquirer
POLICY reversals and policy inconsistencies have been one of the key reasons the country and its government are persistently unable to earn enough faith and trust from the foreign business community, international development and finance institutions, and from its own people. Our economic policymaking has been characterized as one where we keep stepping backward even as we also try to step forward--sort of like dancing the tango. We can't seem to move forward consistently and continuously.
Another step backward
This relatively low level of trust has been a key factor that has kept the Philippine economy from attracting as much investments and attaining the same dynamic performance displayed by our closest neighbors in recent decades. Economists describe it as having a lower level of sustainable growth than our better-performing neighbors. While Singapore, Malaysia and Thailand managed to sustain rates of economic growth of at least 8 percent for well over a decade in the 80s and 90s, it is estimated that the maximum rate of economic growth we can sustain would be more in the neighborhood of 5-6 percent. Indeed, that's where we are at the moment.
Whether we can finally break out of this lower sustainable growth path has been put into serious question with yet another glaring backward step taken recently by the government. Offering no justification whatsoever, Executive Order 558 repealed EO 138 in a one-liner order, two days short of the latter's seventh anniversary.
In the wrong business
Last week, we explained when government is justified in making direct interventions in the economy, and when it is not. One of the widely agreed principles is that the government has no business being in a business that can be handled more efficiently and more effectively by the private sector.
Is lending money to the public one of them?
Experience through four Presidents had led us to an unequivocal answer. The Aquino administration made it a policy to abolish direct lending by government nonfinancial agencies. The Ramos administration created the National Credit Council to rationalize all directed credit programs. And the Estrada administration issued Executive Order 138 spelling out the government's clear policy on directed credit programs: It put a definitive end to the granting of loans to target sectors by its nonfinancial agencies.
Failed experiments
EO 138 articulated a wisdom gained from accumulated experience out of numerous failed government experiments with direct lending, spanning the Marcos-era Masagana 99 rice program of the 1970s, and the Kilusang Kabuhayan at Kaunlaran (KKK) in the 1980s. The bulk of the subsidized loans were never paid back, and the rural banking system nearly collapsed.
The lessons learned then were clear. Funds lent directly by the government were seen by borrowers as dole-outs that need not be repaid--and so they hardly did. Nonfinancial government agencies do not have the capability to run loan programs, and invariably mismanaged them at great loss. Interest rate subsidies entail huge costs to the general taxpayer and had contributed to the fiscal instability of the government. The programs became a disincentive for private financial institutions to provide credit to smaller borrowers, as they could not compete with the cheap funds being dispensed by the government. And the list of lessons goes on.
Microfinance boom
Estrada's EO 138 paved the way for the current dynamic growth in microfinance initiatives coming from the right source: The private financial institutions. In recent speeches, BSP Governor Amando Tetangco has noted that from just about 55 banks claiming to do microfinance before 2000, there are now nearly 200 private financial institutions, with a portfolio of P3.3 billion reaching more than 600,000 beneficiaries, engaged in microfinance operations. And now the rural banking system is not only back on its feet; it is actually doing quite well and is playing a key role in financing the livelihoods of the rural poor.
Indeed, EO 138 helped earn for the Philippines recognition from the United Nations for having the best micro-finance policy in the world.
Politics first
It would seem irrational, then, that Malacañang--especially with a Ph.D. economist President--would repeal a policy that had not only achieved so much and done so much good, but earned us international admiration too. Not even the key economic managers were consulted in the issuance of the offending EO 558; thus, they have been hard-pressed to explain it. Gone are the days of President Ramos's strict requirement for "CSW"--completed staff work--before he would sign any presidential issuance.
But it doesn't take a genius to understand why some people in government would want its various agencies to be able to hand out cheap money to the public all over again. This time, they carried the tango and won out over the forward-stepping economists.
Comments welcome at chabito@ateneo.edu
No business being in business?
by Cielito Habito
Inquirer
WHEN must government intervene in the economy, and when must it keep its hands off?
Academic economists are often faulted for being too partial to liberalized markets. But not even the most zealous free-market economists would argue that the government should entirely keep its hands off the economy.
Interventions
Should government be in the business of producing and selling goods and services--like rice, medicines, electricity, education, health services, or third-party liability car insurance--to the public, or should it just leave these to the private sector? Should it be telling private firms what and how much they must produce? Should it pick "winners" among the economic sectors and bias government tax and subsidy policies toward them?
Is it right for government to tax its citizens' every move, from earning an income, owning property, travelling abroad, selling/buying cigarettes, text messages, and practically everything else--and then decide who can be exempted from paying these taxes? Should it tax the rich more heavily than it does the poor--or even the other way around (which we indicated in last week's column to be our actual situation!)?
Invisible hand
It is largely true that leaving the markets alone usually leads to outcomes that are efficient--that is, one where the economy's limited resources are put to their best use. When the government tries to "play god" and decides what, how much, how, and for whom goods and services are to be produced--in short, the basic resource allocation decisions in the economy--it invariably fouls things up. China and the former Soviet Union tried it for many years, and eventually decided to give it up and rely more on the free market, even now embracing the WTO. North Korea and Cuba persist in that path, with disastrous effects for the former, and unclear effects in the latter.
Adam Smith, considered the father of modern economics, had argued in the eighteenth century that left to themselves (laizzez faire), markets would be guided by an "invisible hand" that ensures the most efficient outcomes.
When markets failBut perhaps what Adam Smith did not explain enough was that markets are far from perfect. They often fail to yield efficient outcomes, and more often, fail to yield outcomes that are equitable or fair. Economic textbooks give at least three reasons why markets fail: public goods, externalities and economies of scale.
Some goods and services are public goods that, in the words of economists, are non-rival and non-excludable. When you buy a nice dress for yourself, you keep everyone else from using it; it is a rival good. But when you benefit from the security of having a national defense system in place, others can benefit from it as much as you do (non-rival), and neither can anyone prevent everyone else from enjoying that benefit as well (non-excludable). In such cases, people will want to "free-ride" and avoid paying for these services, or at least pay less than what it really means to them. Thus, it won't work for a private firm to produce and sell such public goods. Government must step in and provide them directly.
Externalities
When firms produce and people consume certain products and services, they could inflict some indirect damage (external costs) or cause indirect benefits (external benefits) on others. For example, when a cement factory pollutes a river, government must make the producer absorb that additional cost imposed on society to lead him to correct it. Government can regulate the production outright (e.g. impose strict pollution controls), or tax the factory in proportion to the pollution it causes. When the owners of dilapidated antique houses in Vigan or Pila spend money to repair and restore their homes, everyone else benefits from the improved ambience and preservation of cultural heritage. Thus, government can be justified in subsidizing their restoration costs (e.g. by real property tax exemptions, as was done in Vigan, or outright funding assistance). Whether costs or benefits, so-called "externalities" may warrant government intervention in the form of additional taxes or subsidies.
Anti-trust laws
Bigger firms often enjoy a cost advantage over smaller ones due to economies of scale, leading to a tendency for bigger businesses to crowd out or "eat up" their smaller competitors. Last week, we identified this phenomenon as a key reason why the rich tend to get even richer. When economies of scale make bigness an advantage in an industry, government can impose rules that neutralize this advantage, prevent big industry players from bullying their smaller competitors with unfair trade practices, or enhance and expand competition in the industry. The U.S. has anti-trust laws that accomplish this; we have yet to provide the same in our legal system.
Government has no business being in business, it is often argued. But as in every rule, there can be valid exceptions. The challenge is in telling when they are indeed valid.
