Policy Advisory

No. 2004-05

THE SPAV LAW REVISITED

Congressional Planning and Budget Department

House of Representatives
September 2004

Abstract
The Special Purpose Asset Vehicle (SPAV) Law or Republic Act No. 9182 was widely expected to
address the problem on non-performing assets (NPAs) of Philippine banks. The process of cleaning
up the balance sheets of banks is seen to provide additional liquidity to the banks and propel stronger
lending to the business sector, thereby stimulating more economic activities.
However, in spite of the SPAV measure and its prescribed deadlines for various stakeholders, current
developments indicate sluggish offloading of the non-performing assets burden of banks. For one, the
18 September 2004 SEC registration deadline for special purpose asset vehicles (SPVs) is critical as it
would allow them to avail of the fiscal incentives provided in the SPAV law.
This paper revisits the SPAV legislation in light of current developments, examines persisting issues
and concerns, and presents policy options.

The SPAV Factor

The Special Purpose Asset Vehicle (SPAV) Law or Republic Act No. 9182, enacted in
January 2003, was widely expected to address the problem on non-performing assets
(NPAs) of Philippine banks. From pre-crisis level of only 2.4% as of 1996, non-performing
assets as a percentage of total bank assets was 13.8% as of June 2004 (Please refer to Annex
1, page15).
NPL Ratio. The share of loans unpaid to the total loan portfolio of banks (or the NPL ratio) is an in important
indicator of the state of the banking sector as well as a barometer of economic performance, in general,
because it is reflective of the ability of the countrys business sector to pay its debt. In 2003, the Philippines
NPL ratio of 14.1% is one of the highest in the region compared with Thailand - 12.9%, Malaysia - 8.3%,
Korea - 2.6%, and Indonesia - 8.2%.

The process of cleaning up the balance sheets of banks through SPAVs would, in turn,
provide additional liquidity to the banks, and propel stronger lending to the business sector,
thereby stimulating more economic activities.
RA 9182 provides the regulatory framework for granting fiscal incentives to asset
management companies (AMCs) or special purpose vehicle (SPVs) that purchase the NPAs
of banks at a discount. The transfer of NPAsdeemed non-performing as of the 30 June
2002 reckoning date1from banks to SPVs shall be exempt from documentary stamp taxes
and creditable withholding income taxes and value added taxes, only for a period of two (2)
years from the approval of the implementing rules and regulations (IRR). The sale or
transfer of NPAs from an SPV to a third party shall be eligible for similar tax incentives for a
period of not more than five (5) years from the date of the acquisition by the SPV.
The Philippine AMC
Unlike other countries in Asia, e.g., Indonesia, Malaysia, Thailand, and South Korea, the
Philippine government has not taken the lead role in the creation of asset management
companies. Instead, it encouraged private sector participation through SPVs as a
decentralized mechanism to resolve the NPAs of banks (see Table 1, next page).
The weak financial position of the government as reflected in its growing budget deficit and
mounting debt problem constrained the establishment of a centralized AMC as this would
require huge capitalization from the government and the absorption of losses in NPA
1
This cut-off period for eligibility was meant to prevent possible moral hazard such as borrowers deliberately defaulting on their loans. Without the eligibility
period, borrowers may not fulfill their obligations in view of the opportunity to redeem collateral through the SPV at a discount.

transactions. Also, centralized AMCs tend to be costly due to high operational cost and the
erosion in the value of undisposed and unstructured assets over time (Hagiwara and Pasadilla:
2004).
Table 1. Comparative AMC Models
of Asian Economies
Selected
Special NPL
Centralized/
Countries
Law/NPL
Decentralized
Body
China
The Big Four
Centralized
India
SARFAESI
Decentralized
Japan
RCC
Centralized
Taiwan
-Decentralized
S. Korea
KAMCO
Centralized
Indonesia
IBRA
Centralized
Philippines
SPAV
Decentralized
Thailand
TAMC
Centralized
Malaysia
Danaharta
Centralized
Sources: Ernst and Young, Philippine Institute of Development
Studies (PIDS)

Post SPAV Developments

A limited time frame was set for buyers and sellers to qualify for the tax-related benefits
offered under the SPAV Act. After the approval of the implementing rules and regulations
(IRR) on 19 March 2003, the following deadlines should be met:

September 18, 2004 Applications for the establishment and registration of an SPV
shall be filed with the Securities and Exchange Commission (SEC) not beyond 18
months from the date of approval of the IRR.

March 19, 2005 Sales and transfers of NPAs from financial institutions to an SPV
or transfers by way of dacion en pago shall be entitled to the tax privileges for a
period of not more than two (2) years from the date of the approval of the IRR.

Sales and transfers of NPAs from an SPV to a third party are qualified for the tax
privileges only for a period of not more than five (5) years from the acquisition by the
SPV.

Number of Registered AMCs/SPVs. Even as the 18 September 2004 deadline nears,

reports indicate that only eight (8) SPVs have so far registered with the SEC. These include
the following:

Asset Conversion and Enhancement Strategies (SPV-AMC), Inc.

RIS (SPV-AMC), Inc.
Colony Investors Inc.
Lomarc Realty (SPV-AMC) Corporation
First Sovereign Funds (SPV-AMC) Corporation
EB Capital, SPV-AMC (Asset Management Company), Inc.
Philippine Asset Management (SPV-AMC) Inc.;
Cameron Granville Asset Management (SPV-AMC), Inc.

Prospective international investors or investment banks such as Goldman Sacchs,

Lehman Brothers, Morgan Stanley etc. have yet to register with the SEC.2
NPA Reduction. Non-performing assets may be stricken off from the books of local banks
through: (1) NPA transfer to SPVs at substantial discounts; (2) Sale of ROPOA (real and
other properties owned and acquired) to individuals; and (3) Dacion en pago - or payment
whereby property, whether real or personal, tangible or intangible, is alienated in favor of the
creditor, which could be a financial institution (FI) or an SPV, in satisfaction of an NPL.

NPA Transfer to SPVs. After the implementation of the SPAV law in March 2003,
financial institutions in the country have cautiously embarked on negotiations for the
disposal of their respective NPAs only to retreat at the steep discounts offered by
international distressed asset investors.
Nonetheless, important developments in the financial system took place in 2004 that
ended the long-time wait for large-scale NPA transactions in the country (see table 2).
These major NPA deals set the pace for future NPA-related transactions in the
country.
Table 2. Philippines NPA Deals
(April 2003-September 2004)
Local Financial
Institution
National Home
Mortgage
Finance
Corporation
(NHMFC)
Bank of the
Philippine
Islands (BPI)
Rizal
Commercial
Banking
Corporation
(RCBC)

Asset
Management
Company
Deutsche Bank
Real Estate
Global
Morgan-Stanley
Emerging
Markets Inc.
Lehman
Brothers

NPA Value
Date
March 18, 2004

P13.4 Billion

July 21, 2004

P8.6 Billion

August 27, 2004

P3.9 Billion

Source: Cited in BusinessWorld reports

Sale of ROPOA to Individuals. Given the difficulty of effecting wholesale NPA buyout, local banks sell their bad assets directly (by piecemeal basis) to retail investors.
In a BSP report in July 2004, about P73.0 million ROPOA were sold to individual
investors3. Retail transactions comprise P73.0 million out of the P3.2 billion worth of
NPAs transferred to interested buyers.
Banks are interested in tapping retail investors due to the relatively more favorable
asset valuation for the banks owing to low discounts afforded to interested investors.

Investment banks tend to delay their registration with the SEC until an NPA transaction with local financial institution is undertaken to
minimize huge capital exposure as required in the SPAV law. As provided under the IRR, SPVs are required to pay a registration fee of 1/10
of 1% of the aggregate offering price of the investment unit instruments (IUI), subject to the diminishing fee set by the SEC.

Based on the 40 Certificate of Eligibility (COE) issued to 16 banks with a book value of P3.2 Billion. COEs are issued by the BSP as to the eligibility of NPL
or ROPOA for purposes of availing of the tax exemptions provided in the law. Additionally, 16 more banks have pending COE applications with total NPA book
value of P6.7 Billion. This is composed of P745 million worth of ROPOA sales to individuals and P5.9 billion worth of dacion en pago. (Based on an interview
with BSP sources)

Dacion en pago. A large chunk of the total NPAs transferred or 97.7% of the P3.2
billion worth of NPAs were settled through dacion en pago, which likewise qualifies
for fiscal incentives provided under the SPAV Law.

Other Developments. Also, as cited in newspaper reports, more than 23 banks have
planned to dispose their NPAs collectively estimated to reach at least P100 Billion. Among
the local banks that have expressed their intention to sell bad assets under the SPV law
are the following:
Table 3. Potential NPA Deals
Interested Local Bank
United Coconut Planters
Bank (UCPB)
Land Bank of the Philippines
(LBP)
Philippine Bank of
Communications (PBCOM)
Rizal Commercial Banking
Corporation (RCBC)
Equitable-PCI Bank
Metropolitan Bank and Trust
Company1

Targeted NPL Sale

P15 billion
P20 billion
P12.5 billion
P10 to 11 billion
P5 to P10 billion
P16 billion

Note: 1/ Metro Bank signed a deal with Dutch cooperative Rabobank

as cited in BusinessWorld July 22, 2004.

Issues on the SPAV

1. The September 18, 2004 Deadline. Extending the deadline4 for SPVs to register with
the SEC can only be done through new legislation. While there may be wholesale NPA
deals that were already completed, most banks are still in the negotiation and planning
stage of disposing their bad assets portfolio to prospective investors.
In the event that efforts to extend the deadline fail, there have been proposals from
certain quarters for banks to establish their own SPV and register with the SEC.
However, this option may violate Section 3 (l) of the law, which states that the
transferring financial institutions (FIs) shall not have direct or indirect management of the
transferee SPV; and that the selling FI does not possess a claim of beneficial ownership
of more than five percent (5%) in the transferee SPV. The downside for banks
considering the setting up of their own AMC can be summed up as follows:

Normal banking functions of extending loans to businesses may be hampered;

Bank personnel may lack the skills to restructure troubled debt;

Subsidiary AMC can be used by parent bank to window dress its bad loans problems
by transferring assets to the AMC at artificially inflated prices;

Process of asset transfer may either be tantamount to a bailout of the bank by the
AMC or the transfer becomes a cosmetic bank restructuring;
Nonetheless, certain financial organizations contend that this option by banks to create
their own SPVs is on a temporary basis only. Banks will not only be selling bad debts in
the future, they will also be selling the asset vehicle itself once a deal to acquire their bad
assets is finalized.

BSP officials queried pose no objection to an extension but only by an act of Congress.

2. NPA Pricing. Although a market phenomenon, the issue on asset valuation or the huge
gap between targeted selling price of assets by banks and the bid price of prospective
SPVs will continue to hamper NPA reduction efforts.
Local banks want higher recovery rate in their NPA sales, practically to avoid booking
significant losses that will affect their capital adequacy ratios while SPVs desire for steep
discounts (as much as 80% to 90%) because of the various risks associated with NPA
purchase. The fragile position of banks and their inability to absorb losses in NPA
transactions, especially with international investors, and the wait and see attitude of
local banks often frustrate the countrys efforts on bad assets disposal.
3. The Legal Environment. The countrys bankruptcy law has led banks to grapple with
restructuring the loans of their borrowers. As provided under the Interim Rules of
Corporate Rehabilitation, courts are given the power to approve a rehabilitation plan
even over the opposition of creditors holding a majority of the total liabilities of the debtor
if, in the courts judgment, the rehabilitation of the debtor is feasible and the opposition of
the creditors is manifestly unreasonable.
Rehabilitation plans prevent banks from foreclosing properties, thereby impeding the
transfer of these assets to the banks balance sheets. Restructuring efforts are
hampered by the countrys legal system deemed by some quarters as more favorable to
borrower rights. As such, many borrowers tend to exploit the loopholes in the legal
process to frustrate creditors and gain additional time to delay debt repayment.
4. Constitutional Constraint.
Considering that most loan collateral is land, the
constitutional ban on foreigners from owning real estate also prevents prospective NPA
buy-outs by international investors.
What has been done? Mechanisms that were already in place and others that were initiated
and improved by regulatory authorities supported the implementation of the SPAV law.

The government has adopted globally acceptable loan classification standards

similar to the US and other countries in Asia. The government uses a six-tier loan
classification system where allowance for probable losses on the loan accounts were
also differentiated:

Classification
Unclassified
Loans Especially Mentioned
Substandard Secured
Substandard Unsecured
Doubtful
Loss

Allowance
0%
5%
6% to 25%
25%
50%
100%

Source: Circular No. 247 (Series of 2000)

BSP

To address the sentiments of the creditors, monetary authorities have provided

sweeteners for banks to dispose their bad assets to SPVs. Under the revised rules
(Memorandum to All Banks dated February 16, 2004), banks may stagger the booking of their
losses from the sale of NPAs for ten (10) years from seven (7) years previously. With
this, regulators are optimistic that banks would still be able to maximize their NPA
sales even at substantial discounts to SPVs.

The enactment of the Securitization Law (Republic Act No. 9267) last 18 March 2004
provides the regulatory framework for the sale of assets, such as loans, mortgages,
receivables, and
Box 1.0. The time and cost required to resolve bankruptcies is shown below. Costs include
other
debt
court costs as well as fees of insolvency practitioners, lawyers, accountants, etc. The
instruments
as
Recovery Rate measures the efficiency of foreclosure or bankruptcy procedures, expressed in
new securities to
terms of how many cents on the dollar claimants recover from the insolvent firm. The
recovery in Philippines is 3.9 compared with the regional average of 30.4 and OECD average
raise capital.

of 72.1

The measure supports

the development of the
Time (years)
5.6
3.6
1.7
countrys capital market
Cost (% of estate)
38
29.8
6.8
Recovery Rate (cents on the dollar)
3.9
30.4
72.1
and the creation of a
Source: Adopted from World Bank Website Doing Business: Snapshot of Business
favorable environment for
Environment - Philippines
a range of asset-backed
securities. Given the limited capital of SPVs to acquire the billions worth of NPAs of
banks, the Securitization Law will allow SPVs to float securities backed by NPAs, to
recapitalize itself for further NPA deals.
Indicator

Philippines

Regional
Average

OECD
Average

What needs to be done?

The Philippines is poised to address the banks NPAs through diversified modes of bulk and
piecemeal NPA transactions - securitization of distressed assets, total write off, loan
collection and loan workouts. Similar to other countries, the Philippines needs foreign
investment to stimulate significant NPA transactions and provide the catalyst to bolster the
countrys financial system.
As such, the country could draw from the experiences of other Asian economies that provide
a wealth of ideas and best practices for addressing NPAs (see Annex 2). Moreover, the
government should be more aggressive in effecting broad-based reforms, especially prompt
corrective action, and full implementation of consolidated and risk-based approach to bank
supervision (MTPDP Financial Subcommittee: 2004), not only to reduce NPAs but also mitigate the
need for SPVs to address the NPAs of the financial sector.

Serious Recognition of the NPA burden.

Government should adopt the international norm in recognizing NPLs. Several
countries are shortening to 90 days from 180 days or more, the period when unpaid
loans become past due. The intent is to put loans on lenders watch lists sooner and
require them to address these loans before losses starts to escalate.
To substantiate its NPA reduction strategy5, the government should set NPL
reduction targets to be achieved in a given period of time. China, Japan and Taiwan
for instance have adopted this strategy.

Address Outstanding Legal Issues. The government should have the political will
to balance the interests of both creditors and debtors by effecting the necessary
changes in the countrys bankruptcy laws and mitigate the time and cost required to
solve bankruptcies (Please refer to Box 1.0 adopted from the WB Study Doing Business).

5
In some cases, integration of NPLs into forecasting the gross domestic product is encouraged given the adverse impact of maintaining
large NPL portfolio to GDP growth. (Cited in Ernst and Young Global NPL Report 2004)

The country could take note and consider new developments in the legal front in
other countries. India enacted its Securitization and Reconstruction of Financial
Assets and Enforcement of Security Interest (SARFAESI) Law intended to toughen
banks powers to take over the management of a defaulting company or take
possession of the mortgaged assets of loan defaulters largely without the intervention
of the courts. Moreover in Asian countries that established public AMCs like
Malaysia, Thailand, South Korea, etc., NPA reduction efforts were more successful
because of the special legal powers of these AMCs that facilitated asset recovery
and restructuring.

Securitization Laws IRR. There is a need to promulgate the implementing rules

and regulation (IRR) of the Securitization Law and ensure its effective
implementation through continuing oversight.

Sources/References
Asia Recovery Information Center (ARIC) website: http://aric.adb.org
Banko Sentral ng Pilipinas (BSP) website: www.bsp.gov.ph
Ernst and Young, Global NPL Report in 2004
Ernst and Young, NPL Report: Asia 2002, November 2001.
Ingves S., Seelig S. and Dong He. Issues in the Establishment of Asset Management Companies. International Monetary
Fund
Pasadilla G.and Terada-Hagiwara A. Experiences of Crisis-Hit Asian Countries: Do Asset Management Companies Increase
Moral Hazard?. Philippine Institute of Development Studies
Pricewaterhouse Coopers, NPL Asia, October 2002
The Special Purpose Vehicle Act of 2002 (Republic Act No. 9182) and Implementing Rules and Regulations (IRR).
Various BusinessWorld Artilces
Various Philippine Daily Inquirer (PDI) Articles
Interviews with various resource persons

ANNEX 1
The SPAV and the Philippine Banking System
Non-Performing Assets. Non-performing assets (NPAs) of Philippine banks consist of non-performing loans (NPLs) and real
and other properties owned and acquired (ROPOAs). With more than a year of the implementation of the SPAV, NPA as a
percentage of the total bank assets in June 2004 stood at 12.3%, a drastic change from its pre-crisis level of only 2.4% of total
assets.
Table 4. Universal and Commercial Banks
NPL Indicators

Note:

Particulars
June 2003
1
445.3
Non-Performing Assets
(in P B)
2
NPA/Total Assets (in %)
13.4
Non-Performing Loans
258.3
(In P B)
NPL/Total Loans (in %)
15.2
ROPOA (in P B)
190.9
ROPOA/Total Assets
5.7
(in %)
Source: BSP

June 2004
446.8
12.3
244.9
13.8
207.5
5.7

1. NPL plus ROPOA; since July 2003, ROPOA excluded

performing Sales contract receivables per BSP
Circular No. 380 dated March 28, 2003;
2. Inclusive of loan loss reserves and provisions for
ROPOA; and Net Due From/To Head Office/Other
Agencies/ Branches of foreign banks branches;

1.

Non-Performing Loans (NPLs). Non-performing loans refer to loans and receivables whose principal and
interest have remained unpaid for at least 180 days after they have become past due or any of the events of
defaults under the loan agreement has occurred. While NPL ratio has gone down from 15.2% in June 2003 to
13.8% in June 2004, this has not been brought down to single digit level since the July 1998 NPL ratio of 9.6%.

2.

Real and Properties Owned and Acquired (ROPOA). ROPOA refers to real and other properties owned and
acquired by a financial institution in settlement of loans and receivables, including real properties, shared of stocks
and chattels, which have been acquired through dacion en pago or judicial/extra-judicial foreclosure. The ROPOA
to gross assets ratio recorded in June 2003 of 5.70% slightly eased to 5.68% in June 2004. However, this is far-off
from the pre-crisis ROPOA to total assets ratio, which stood only at 0.63%.

TOTAL LOAN PORTFOLIO

(In Billion Pesos & in Percent)
2000

35
30
25
20
15
10
5
0
-5

1500
1000
500
0
1996 1997 1998 1999 2000 2001 2002 2003
Total Loans

Growth Rate

Source: BSP
Total Bank Loan Exposure. After it recorded a strong growth of 28.8% in 1997 to P1,573.1 billion from P1,221.8 billion
in 1996, it plummeted by 1.9% in 1998. From then on, bank loans hardly showed robust growth. The large overhang of
NPAs continues to weigh heavily on the quality of credit portfolio of banks, which created a drawback on the capital of
banks. Consequently, the ripple effect is on the scarce credit availability to finance businesses. It was only in 2003 when
credit growth regained its momentum when it grew by 6.6% to P1.7 trillion from P1.6 trillion in 2002.

NPL/Total Loans Ratio

(Cross Country Comparison)
16
14
12
10
8
6
4
2
In
do
ne
si
a
So
ut
h
Ko
re
a

M
al
ay
si
a

Th
ai
la
nd

Ph
i li

pp
in
es

Source: Asian Recovery Information Center (ARIC)

Neighboring countries in Asia have absorbed significant portions of their NPLs through their respective AMCs, and
eventually disposed them to a third party,
Country
Indonesia
Malaysia
Philippines
South Korea
Thailand
Notes:
1/ As Percentage of Total NPLs in 2003
2/ As Percentage of NPLs acquired;

NPL Purchases by
NPL Disposal by
1
2
AMCs
AMCs
89.6
76.7
39.3
100
--79.3
63.2
50.4
73.5
Source: ARIC

10

ANNEX 2
Some Notes on the AMC Models of Asian Economies
1.

China
The four (4) state-owned banks of China or the Big Four which includes the Agricultural Bank of China, Bank of
China, China Construction Banks, and the Industrial and Commercial Bank recorded 20.36% NPL ratio in 2003, an
improvement from 26.1 ratio in 2002;
China has employed two (2) general treatments in resolving its NPL problem, which include: (1) Direct Injection by
the government to banks, and (2) NPL transfers to AMCs;
Chinas need to develop a more efficient banking system, and the urgency to reduce NPA holdings of its banks,
clean up their balance sheets and improve their credit ratings are all necessary steps to prepare the country for
opening its domestic banking market in 2007 to foreign banks as part of its commitment in the World Trade
Organization (WTO).
Chinese government aimed to reduce their NPL ratio to 15% in 2006, to less than 10% in the succeeding years in
order to qualify for a listing on foreign stock exchanges;

2.

Taiwan
The Financial Institutions Merger Law in 2000 led to the establishment of AMCs as legal vehicle to purchase
NPAs;
The Financial Restructuring Fund in 2001 was created to address the profitability and solvency problems
encountered by many of Taiwans community credit cooperatives;
The passage of Taiwans Financial Asset Securitization Law in 2002 created favorable conditions for the issuance
of asset-backed securities which led to the rapid securitization of NPLs in the country;
In 2002, the Executive Yuan, Taiwans executive branch instituted a 2-5-8 plan for financial sector recovery. It
requires all financial institutions to have an NPL ratio of below 5% and capitalization of more than 8% within 2
years. Failing banks are faced with stiff penalties which will definitely distort their normal operatioins i.e.
restrictions on establishing new branches, fines, prohibition of long-term investments, etc.;

3.

India
In November 2002, the Indian government enacted the Securitization and Reconstruction of Financial Assets and
Enforcement of Security Interest (SARFAESI) Law. This law enabled lenders to foreclose and sell underlying
assets without court order intervention. This law has strengthened banks powers to take over the management of
defaulting company or take possession of mortgaged assets of loan defaulters so long as it owns majority of the
loans at least 75% of the total loan of borrowers;
The SARFAESI law also provides the framework for the formation of asset reconstruction companies (ARC) tasked
to take over the management of the borrowers business, reschedule debt payments, enforce security interest as
provided in the law, and settle dues payable by the borrower. ARCs are allowed float fund schemes to raise
capital from investors to acquire NPLs from the banks;
Indias first ARC was the Asset Reconstruction Company of India, Ltd. (ARCIL) which was established by Indias
three (3) largest financial institutions, namely the State Bank of India, the ICICI Bank, and the Industrial
Development Bank of India. In 2004, ARCIL acquired NPLs of six (6) huge companies amounting to US$500
million.
The Corporate Debt Restructuring (CDR) system provides a framework for banks and institutions to restructure
stressed loans in a joint effort should the 75% of the lenders in value act together. ARCs can use the CDR
mechanism to push through resolution decisions, whereby lenders normally will compromise on the interest rate
reduction, and stretch maturity dates of loans. The CDR process has been widely considered a success resulting
so far in approvals of restructuring schemes for 41 large cases worth US$9 billion.
Indian banking sector also adopted an NPL classification norm (substandard, doubtful and loss), patterned after
international standards, based on the period for which the asset has remained non-performing and the likelihood of
recovering the amount due.

Source: Ernst and Young 2004