LGU Bonds

Among the alternatives: Local Government Unit (LGU) bonds

LGU-Development Bank

LGU-Development Bank

Local government unit (LGU) bonds are a young creation, says vice president Antonio “Johnny” Villanueva of Preferred Ventures, Corp. since the first LGU bond issued was in 1999. But these have been a way for the country’s towns, cities and provinces to raise funds for needed infrastructure and income-generating projects.

LGU bonds are interest-bearing instruments that LGUs issue to finance their operating or capital cost of a special project. Ordinary people and financial institutions such as banks can invest their money on an LGU’s revenue-generating project of the LGU, which issues the bond. The LGU, explains Villanueva, in turn promises to pay the investor a specified amount of interest (usually semi-annually) and return your money (the “principal”) on a specified maturity date (such as seven years). These same LGUs have identified various priority projects that also generate needed local government income.

These include: mass housing, public markets, bus, jeepney or ferry terminals, commercial complexes, refrigeration and cold storage facilities, mass transport system, slaughterhouses, air/sea ports, eco-tourism projects, industrial estates, reclamation areas, waste disposal system, and a potable water system. LGU bonds have financed projects such as the Daraga Public Market (Daraga, Albay), the Masbate Fish Complex (Masbate province), and the Boracay Ferry Port Terminal (Boracay Island, Aklan).

There are several layers of guarantees for LGU bonds. Primarily, these are revenue-generating projects that are self-liquidating, and are subject to feasibility studies, aside from a ratings system on the financial capability of LGUs. The Local Government Unit Guarantee Corporation (LGUGC), a private guarantee institution providing credit enhancement to LGU debts, provides another layer of guarantee (LGUGC is owned by the Bankers Association of the Philippines, the Development Bank of the Philippines, and the multilateral Asian Development Bank). When all these fail, the internal revenue allotments (IRAs) of LGUs stand as guarantees to ensure that investors will be paid.

Overseas Filipinos can be investors of these bonds as part of the secondary market, Villanueva said. He also

Economic Resource Center for Overseas FIlipinos

Economic Resource Center for Overseas FIlipinos

encouraged hometown associations of these Filipino migrants to invest in these bonds, and even determine the income-generating project that their hometown back home must embark on through their investment. These investors from abroad do not only earn from the interest, but their investment into these bonds is an opportunity for these migrants to be vigilant watchdogs of their hometown government’s performance.

Antonio Villanueva does financial advisory services to local government units through Preferred Ventures, Corp. (formed and owned by renowned investment banker Sixto Roxas).

Taken from: Overseas Filipinos and Hometown Development, (ERCOF) by: A. Ranque


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