The MRT deal looks uncannily like the Philex one, only in reverse.
MRT was formed to build and maintain a 17 km. mass transit line. It was originally owned by the Ayala, Fred Ramos, Agustines, Fil-Estate and J.Y. Campos groups. Under a 25 year Build-Lease-Transfer (BLT) arrangement, the Government would lease and operate the system in exchange for Equity Rental Payments (ERP) guaranteeing a 15% p.a. return on equity to MRT, a maintenance fee, and recovery of taxes. The project was completed in 2000.
In 2002, the MRT shareholders (except Ayala) securitized their share of the ERPs through the issuance of MRT III Funding Corp. (MRT3FC) bonds and preferred shares that were sold to outside investors i.e. they exchanged their claim on the future ERP flows for an upfront payment. After the securitization, the economic interests in MRT were MRT3FC 77.7%, Ayala 19.9% and minorities 2.4%.
Ayala subsequently sold its interest to Goldman Sachs.
The Government was soon owing more in lease payments than it was collecting in revenues because of the devaluation of the peso and the subsized fares to consumers; and fell behind in its ERP and maintenance obligations. Some MRT3C bondholders filed for arbitration in Singapore and Netherlands seeking over $230 MM in damages.
Rather than continue to support a losing proposition, in a “Consensual Unwind” the Arroyo Government decided to buy back the bonds and preferred shares of MRT3FC and MRT (“the Securities”). DBP and Land Bank (GFIs) would equally fund the exercise with DBP President, Rey David, leading the negotiations.
Here the plot thickens.
In Dec. 2008, the GFIs extended a $180 MM loan (P 8.6 billion then) to Global Air Services (GAS), an offshore company with $2 in capital and $400,000 in losses, to buy Securities. It is unclear who owned the company. Josephine Manalo, the secretary of Bobby Ongpin and his lawyer Rodolfo Ponferrada, were apparently company signatories.
In April 2009 or 5 months after, the GFIs bought GAS (which now owned the Securities) by offsetting the loan against the purchase price.
So what is the beef?
There are two issues: The Government’s decision to buy the Securities and the method of the buyout. The former is defensible depending on the price paid which was never publicly revealed: How did it compare with that of other Philippine dollar bonds with similar maturities? Then DOF Sec. Gary Teves (and now director of Atok Big Wedge and Alphaland, two companies owned by Ongpin) said the transaction would save the country $380 MM representing the difference between the ERP payments and the cost of the buyout. This still begs the question of whether it was the best possible.
The second and trickier issue is with the method.
In a buyout of securities, the accepted practice is to engage a reputable investment bank to transparently tender for them.
Instead, $180 MM was “lent” to GAS, a shell company with unclear beneficial owners and absurd financials. The loan was expedited and ignored all credit standards. The money, it turned out, was used to buy Securities from four entities, Goldman ($64.5 MM), Presidio Capital ($26.5 MM) and two Ashmore funds ($87.6 MM). Ashmore is allegedly represented by Ongpin.
Other than initials that are flatulently appropriate, what is so special about GAS that Rey David (currently a director in three Ongpin companies) chose to deal with it speedily, selectively and surreptitiously? The GFIs knew or could have found out who were the big holders of the Securities. Why not deal directly with them?
Why was the deal structured as a loan? Why lend money to somebody to do something you can do yourself? Was it to allow the proponents to “front run”, to accumulate the Securities at a price before reselling them to the GFIs at a higher price?
Two Ashmore funds had a large position in the Securities. If indeed Ongpin represented Ashmore and GAS, then the man had the rare and enviable position of negotiating with himself, unsupervised, courtesy of GFI (our) money.
The principals also profited by charging fees. The GFIs were billed “transaction costs” of $1 MM. There was another entry of $3.6 MM which looked like a fee. What is clear is that they did not do it for love of country alone.
The MRT deal is a bad rerun of a plot with protagonists that the Filipino has, unfortunately, seen before. The script seemingly follows the Philex insider scheme: (1) Identify a buyer for the securities and his price; (2) Acquire the securities below that price using easy Government bank loans; (3) Flip the securities to the buyer (Pangilinan in Philex and the GFIs in MRT) for a quick profit.
It is hardly rocket science but it works.
So just when we thought we had our fair share of muggings, guess what, I think we just got mugged again.
(Epilogue: After GAS, the GFIs continued to buy Securities in the market. By July 2010 they owned 80% of MRT. They are currently seeking to sell the company since they are not authorized to own non-allied undertakings. Manny Pangilinan has offered to buy but is asking for concessions.The DOTC has updated its ERP arrears.)