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KNOWING THE PHILIPPINE FINANCIAL MARKET A Group 8 Report

To understand fully well the Philippine Financial Market, it is important to discuss the investment scenario in our country. An investment is any vehicle into which funds can be placed with the expectation that they will generate positive income and/ or their value is preserved or increased.1 The overall investment process is the mechanism for bringing together suppliers (those having extra funds) with demanders (those needing funds). Normally, suppliers and demanders are brought together through a financial institution or a financial market although there are instances such as property transactions, where buyers and sellers directly deal with one another. Financial institutions are organizations through which the savings of an individuals, corporations and governments are channelled into loans or investments. Example of financial institutions are the banks, investment houses, mutual funds, pension funds and insurance companies. However, Financial markets provide the legal and tax framework or environment that bring together suppliers and demanders of funds to make safe and quick financial transactions, often though intermediaries such as organized securities exchanges. Financial market works as conduit for demand and supply of debt and equity capital. It channels the money provided by savers and depository institutions to borrowers and investees through a variety of financial instruments called securities. Financial market markets for sale and purchase of stocks (shares), bonds , bills of exchange , commodities, futures and options, foreign currency and more which work as exchanges for capital and credit. The three key participants in the investment process are government, business and individuals. They can either be a demander or supplier of funds. There is a wide range of investment vehicles available to the investor . These are the following vehicles: A. Securities Securities are investment that represent evidence of debt or ownership interest in a business or other assets. Bonds and stocks are the most frequently used types of securities.

Jose Luis U. Yulo Jr. ,Investors Primer , p.1

B. Short term investment Deposit accounts , treasury bills or T-bills, commercial papers, certificates of deposit, promissory notes are examples of short-term investment vehicles. The maturity of all these instruments is under one year. These instruments are suitable for temporary investing idle funds and earning a return usually interest.They are highly liquid since they can be easily converted to cash with little or no loss in value, thus, enabling the investor to quickly obtain funds to meet unexpected obligations or shift to more attractive investment opportunities. C. Common Stock Buying a share of common stock is in fact buying a share of a business. An individual who owns shares in , say San Miguel Corporation has an ownership interest in that company and is called a stockholder or shareholder.

The life of an investment can either be short term or long term. In order that an investment process should run smoothly, the suppliers of funds must be sufficiently compensated by the demanders of funds in exchange for the risk involved in supplying the funds. FINANCIAL MARKET2 Financial Market is a network of various institutions. It generates, circulates and control money credits. It provides intermediation between supplier and use of credit. It provides legal and tax framework that bring together suppliers and demanders of funds. It make safe and quick financial transaction offer through intermediaries such as organized securities exchange. Financial market plays vital role in the economy and society because it finance social and economic development of the country. Financial markets are classified into the following: A. Money market It deals with short term funds. It refers to network of banks, discount houses, institutional investors and money dealers who borrow and lend among themselves for the short term typically 90 days. It also trade in highly liquid financial instruments with maturities

Fajardo & Manansala , Money credit & Banking 4th Ed., p16.

less than ninety ( 90) days to one (1) year such as bankers acceptance, certificates of deposits and commercial paper. B. Capital market It deals with long term borrowing and lending markets. It is highly decentralized system made up of three major parts such as stock market, bond market and money market. It also works as an exchange for trading existing claims on capital in the form of shares. Basically, it is in the capital market called stock market where an investor can buy and sell stocks. This market consist of the primary market and secondary market. Primary market In the primary, newly formed securities are bought or sold to the investing public for the first time . It is where capital is actually raised by the company selling stock directly to investors through INITIAL PUBLIC OFFERINGS (IPO). Transaction exist between issuers and investors. Like for instance, if San Miguel Corporation decides to sell a new stock to raise equity funds, it will be a primary market transaction. Since it is the first time the company has sold stock to the public, it is called initial public offering. The proceeds of the sale will go to San Miguel Corporation, the issuing company. Investors who have subscribed to the IPO have provided the company with the necessary funds to continue its operation and expansion and become part owners of the company. Secondary market The secondary market is where securities can be bought and sold after they have been issued to the public in the primary market.. Thus, if the person decides to buy existing shares of San Miguel Corporation, such person cannot buy them directly from the issuing company anymore since they have all been sold to the investing public during the initial public offering. Investors can only buy these shares from existing shareholders who are willing to sell their shares. When they do so, it is a secondary market transaction. The proceeds from these transaction do not go to the issuing corporation instead it will go to the investors who sold their shares.

Understanding Securities Underwriting

In the financial and stock markets, securities and other instruments are freely traded and moved as long as trade laws allow.

The value of these instruments rise and fall depending on the economic indicators and the status of the issuing entity. Between the rise and fall, or vice versa, income opportunities exists for those who are into this kind of buying and selling landscape. Most often, these instruments goes through the hands of the underwriters or through the process of underwriting. UNDERWRITING EXPLAINED3 The word "underwriter" is said to have come from the practice of having each risktaker write his or her name under the total amount of risk that he or she was willing to accept at a specified premium. In a way, this is still true today, as new issues are usually brought to market by an underwriting syndicate in which each firm takes the responsibility (and risk) of selling its specific allotment. What It Is: Underwriting is the process that a lender or other financial service uses to assess the credit worthiness or risk of a potential customer. Underwriting also refers to an investment banker's process of packaging and selling a security on behalf of a client.

How It Works/Example: Underwriting refers to the structured process used by financial service companies, such as banks, investors, or insurers, to determine and price the risk from a potential client. The underwriting process is a detailed and systematic analysis of a potential borrower's credit-worthiness, including employment history, salary, financial statements and performance, publicly available information, and independent credit reports. The underwriting process is intended to determine the credit needs, the quality of the collateral assets to be used to support the borrowing, and the borrower's ability to repay the debt. Upon completion of a formal underwriting process and a summary presented to a credit committee within the lender, the lender will either approve or reject the request for a loan. Similarly, an insurance company will evaluate the risks of a potential candidate for insurance, based on a variety of actuarial factors. The bottom line from such an underwriting process is to price the insurance in accordance with its associated risk. In securities trading, underwriting also includes assessing the risk and pricing the security accordingly. However, the formal underwriting process also involves agreeing to
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buy the security (by the underwriter) and then selling the security for a profit. The underwriter effectively takes a risk by agreeing to buy the security at the established price. In most instances, underwriters will line up buyers for the securities before they take on the security, so that it can "flip" the security to the buyer immediately.

Why It Matters: Underwriting is a critical step in the credit analysis and risk pricing process for almost all financial service companies. For companies, understanding the underwriting process and the requirements at each stage of the process will allow a company to prepare and present itself accordingly. For investors, the information contained in an underwriting is crucial to understanding the risks and potential rewards from a security's underlying asset.

UNDERWRITING BASICS An underwriter is a securities dealer who helps government entities bring bond issues to market. The key role it plays is to buy the bonds from the issuer and then resell them to investors. In doing so it assumes a financial risk and thus expects to make a profit on the transaction. The difference between the purchase price paid by the underwriter to the issuer and the price at which the bonds are resold to investors represents the underwriter's profit or discount. The underwriter's discount depends on factors such as the interest rate and accurate pricing of the bonds. If the market rate of interest moves against the underwriter after the sale, the underwriter's profit will be lower than expected. Conversely, if the market rate of interest moves in favor of the underwriter, the underwriter's profit will be higher. An underwriter may be independent or part of a securities firm or bank. Often, securities firms and banks have municipal bond departments that carry out functions such as underwriting, marketing or trading municipal securities. Municipal bond underwriting is one of the functions performed by investment banks, which also underwrite corporate stock and bond offerings and advise companies on mergers and acquisitions. Investment banks do not disclose exactly how much of their revenues derive from municipal underwriting, but they have certainly benefited from the rise in recent years in the volume of new municipal issuance, which reached an all time high of $379.1 billion in 2003. This comprised one-fifth of the total of $2 trillion in new securities (municipal and corporate) issued during the year.

SECURITIES UNDERWRITING Securitiesunderwriting refers to the process by which investment banks raise investment capital from investors on behalf of corporations and governments that are issuing securities (both equity and debt capital). The services of an underwriter are typically used during a public offering. This is a way of selling a newly issued security, such as stocks or bonds, to investors. A syndicate of banks (the lead managers) underwrite the transaction, which means they have taken on the risk of distributing the securities. Should they not be able to find enough investors, they will have to hold some securities themselves. Underwriters make their income from the price difference (the "underwriting spread") between the price they pay the issuer and what they collect from investors or from broker-dealers who buy portions of the offering.

Risk, exclusivity, and reward Once the underwriting agreement is struck, the underwriter bears the risk of being unable to sell the underlying securities, and the cost of holding them on its books until such time in the future that they may be favorably sold. If the instrument is desirable, the underwriter and the securities issuer may choose to enter into an exclusivity agreement. In exchange for a higher price paid upfront to the issuer, or other favorable terms, the issuer may agree to make the underwriter the exclusive agent for the initial sale of the securities instrument. That is, even though third-party buyers might approach the issuer directly to buy, the issuer agrees to sell exclusively through the underwriter. In summary, the securities issuer gets cash up front, access to the contacts and sales channels of the underwriter, and is insulated from the market risk of being unable to sell the securities at a good price. The underwriter gets a nice profit from the markup, plus possibly an exclusive sales agreement. Also, if the securities are priced significantly below market price (as is often the custom), the underwriter also curries favor with powerful end customers by granting them an immediate profit (see flipping), perhaps in a quid pro quo. This practice, which is typically justified as the reward for the underwriter for taking on the market risk, is occasionally criticized as unethical, such as the allegations that Frank Quattrone acted improperly in doling out hot IPO stock during the dot com bubble.

Investment bankers engaged in securities underwriting raise capital for corporations through the structuring and sale of securities such as bonds and stocks. Municipal finance is securities underwriting (strictly bonds) on behalf of government entities such as states, counties, municipalities and public authorities. The following are the most common terminologies encountered in the industry: Underwriting syndicate: If investment bankers from more than one firm join forces to engage in a specific securities underwriting effort, they are collectively referred to as an underwriting syndicate. The larger the stock or bond issue is, in terms of dollars to be raised, the larger the underwriting syndicate is bound to be. Public offering: When investment bankers engage in securities underwriting for sale to the general public, the deal typically is called a public offering. Private placements: In some situations, investment bankers structure deals in which the securities are sold strictly to institutional investors, such as pension funds and private equity funds, and not to the general public. Securities underwriting of this sort is typically called a private placement. Best efforts: In best efforts deals, the investment bankers make no guarantees to the issuing firm regarding the quantity of securities that will be sold or the price thereof. In this securities underwriting scenario, the risk associated with unsold or overpriced securities falls strictly on the issuing company or government entity. Firm commitments: In firm commitments deals, the investment bankers do make guarantees to the issuing company or government entity regarding the amount of funds that will be raised through the securities underwriting. The risk associated with any unsold or overpriced securities is borne by the investment bankers. Underwriting fee: The investment bankers earn a fee for advising the client, structuring the securities underwriting, and assuming risk. The portion of the underwriting fee that compensates for risk will be higher in firm commitments deals than in best efforts deal. The underwriting fee is deducted from the proceeds of the securities underwriting, reducing the net amount raised by the issuing company or government entity. Selling syndicate: If multiple financial services firms join forces to sell the product of a securities underwriting to investors, they are collectively referred to as a selling syndicate. The larger the stock or bond issue is, in terms of dollars to be raised, the larger the selling syndicate is bound to be. In most deals, investment bankers typically rely heavily on sales to retail clients (individual clients) through Financial Advisors working for firms in the selling syndicate. Selling concession: The investment bankers compensate members of the selling syndicate

through payment of a selling concession, which is a species of sales commission. The selling concession is deducted from the proceeds of the securities underwriting, reducing the net amount raised by the issuing company or government entity. Underwriting discount, underwriting fee, underwriting commission: Many prospectuses for bond issues and new stock issues do not show the underwriting fees and the selling concessions separately. Instead, they tend to lump them together under blanket terms like these. Depending on the specifics of the deal, it is not unusual for these fees to total around 4% of the total raised by the securities underwriting. At the other end of the spectrum, in cases where a major financial services firm is acting as sole underwriter and seller of a debt issue (usually when it is raising funds solely for its own operations from its own clients), these fees can be under 1%.

THE UNDERWRITING CYCLE4 As with most business cycles, the underwriting cycle is a phenomenon that is very difficult to eliminate. In 2006, insurance giant Lloyd's of London identified managing this cycle as the top challenge facing the insurance industry and published a report by surveying more than 100 underwriters about industry issues. In response to their survey they were able to identify steps to manage the insurance cycle. Unfortunately, the industry as a whole is not responding to the challenges the underwriting cycle brings. The underwriting cycle affects all types of insurance except life insurance, where there is enough information to minimize risk and reduce the effect of the underwriting cycle. Underwriting Cycle are fluctuations in the underwriting business over a period of time. A typical underwriting cycle spans a number of years, as market conditions for the underwriting business go from boom to bust and back to boom again. At the beginning of the cycle, the underwriting business is soft due to increased competition and excess insurance capacity, as a result of which premiums are low. Subsequently, a natural disaster or other catastrophe that leads to a surge in insurance claims drives lesser-capitalized insurers out of business. Decreased competition and lower insurance capacity lead to better underwriting conditions for the surviving insurers, enabling them to raise premiums and post solid earnings growth. This robust underwriting environment attracts more competitors, which gradually leads to more capacity and lower premiums, setting the stage for a repetition of the underwriting cycle. Underwriting Cycle is also known as the insurance cycle.
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Investment Risks Risk is simply the measurable possibility of either losing value or not gaining value. In investment terms, risk is the uncertainty that an investment will deliver its expected return. Before you can make suitable recommendations that are in line with the investment objectives of a client, you must understand the concept of risk, the types of investment risk associated with various investment vehicles and the amount of risk that a client is willing to assume. In general, your clients must first understand that no investment is without risk and that there is a trade-off between returns and the amount of risk an investor is willing to assume in order to reach his or her financial goals. Types of Investment Risks Underwriting securities will never be understood without understanding the risks involved. Then following are some of the common risks underwriters and the actuarial boys crunch for them to know the profit possibility of each and every investment: Interest Rate Risk. Interest rate risk is the possibility that a fixed-rate debt instrument will decline in value as a result of a rise in interest rates. Whenever investors buy securities that offer a fixed rate of return, they are exposing themselves to interest rate risk. This is true for bonds and also for preferred stocks. Business Risk. Business risk is the measure of risk associated with a particular security. It is also known as unsystematic risk and refers to the risk associated with a specific issuer of a security. Generally speaking, all businesses in the same industry have similar types of business risk. But used more specifically, business risk refers to the possibility that the issuer of a stock or a bond may go bankrupt or be unable to pay the interest or principal in the case of bonds. A common way to avoid unsystematic risk is to diversify - that is, to buy mutual funds, which hold the securities of many different companies. Credit Risk. This refers to the possibility that a particular bond issuer will not be able to make expected interest rate payments and/or principal repayment. Typically, the higher the credit risk, the higher the interest rate on the bond. Taxability Risk. This applies to municipal bond offerings, and refers to the risk that a security that was issued with tax-exempt status could potentially lose that status prior to maturity. Since municipal bonds carry a lower interest rate than fully taxable bonds, the bond holders would end up with a lower after-tax yield than originally planned.

Call Risk. Call risk is specific to bond issues and refers to the possibility that a debt security will be called prior to maturity. Call risk usually goes hand in hand with reinvestment risk, discussed below, because the bondholder must find an investment that provides the same level of income for equal risk. Call risk is most prevalent when interest rates are falling, as companies trying to save money will usually redeem bond issues with higher coupons and replace them on the bond market with issues with lower interest rates. In a declining interest rate environment, the investor is usually forced to take on more risk in order to replace the same income stream. Inflationary Risk. Also known as purchasing power risk, inflationary risk is the chance that the value of an asset or income will be eroded as inflation shrinks the value of a country's currency. Put another way, it is the risk that future inflation will cause the purchasing power of cash flow from an investment to decline. The best way to fight this type of risk is through appreciable investments, such as stocks or convertible bonds, which have a growth component that stays ahead of inflation over the long term. Liquidity Risk. Liquidity risk refers to the possibility that an investor may not be able to buy or sell an investment as and when desired or in sufficient quantities because opportunities are limited. A good example of liquidity risk is selling real estate. In most cases, it will be difficult to sell a property at any given moment should the need arise, unlike government securities or blue chip stocks. Market Risk. Market risk, also called systematic risk, is a risk that will affect all securities in the same manner. In other words, it is caused by some factor that cannot be controlled by diversification. This is an important point to consider when you are recommending mutual funds, which are appealing to investors in large part because they are a quick way to diversify. You must always ask yourself what kind of diversification your client needs. Reinvestment Risk. In a declining interest rate environment, bondholders who have bonds coming due or being called face the difficult task of investing the proceeds in bond issues with equal or greater interest rates than the redeemed bonds. As a result, they are often forced to purchase securities that do not provide the same level of income, unless they take on more credit or market risk and buy bonds with lower credit ratings. This situation is known as reinvestment risk: it is the risk that falling interest rates will lead to a decline in cash flow from an investment when its principal and interest payments are reinvested at lower rates. Social/Political Risk. Risk associated with the possibility of nationalization, unfavorable government action or social changes resulting in a loss of value is called social or political risk. Because the U.S. Congress has the power to change laws affecting

securities, any ruling that results in adverse consequences is also known as legislative risk. Currency/Exchange Rate Risk. Currency or exchange rate risk is a form of risk that arises from the change in price of one currency against another. The constant fluctuations in the foreign currency in which an investment is denominated vis--vis one's home currency may add risk to the value of a security. CONCEPT OF RISK vs REWARD One of the concepts used in measuring risk and return calculations is standard deviation. It measures the dispersion of actual returns around the expected return of an investment. Since standard deviation is the square root of the variance, this is another crucial concept to know. The variance is calculated by weighting each possible dispersion by its relative probability (take the difference between the actual return and the expected return, then square the number). The standard deviation of an investment's expected return is considered a basic measure of risk. If two potential investments had the same expected return, the one with the lower standard deviation would be considered to have less potential risk.

Risk Measures There are three other risk measures used to predict volatility and return:

Alpha - this measures stock price volatility based on the specific characteristics of the particular security. As with beta, the higher the number, the higher the risk.

Sharpe ratio- this is a more complex measure that uses the standard deviation of a stock or portfolio to measure volatility. This calculation measures the incremental reward of assuming incremental risk. The larger the Sharpe ratio, the greater the potential return. The formula is: Sharpe Ratio = (total return minus the risk-free rate of return) divided by the standard deviation of the portfolio.

Beta - this measures stock price volatility based solely on general market movements. Typically, the market as a whole is assigned a beta of 1.0. So, a stock or a portfolio with a beta higher than 1.0 is predicted to have a higher risk and, potentially, a higher return than the market. Conversely, if a stock (or fund) had a beta of .85, this would indicate that if the market increased by 10%, this stock (or fund) would likely return only 8.5%. However, if the market dropped 10%, this stock would likely drop only 8.5%.

Asset Allocation

In simple terms, asset allocation refers to the balance between growth-oriented and income-oriented investments in a portfolio. This allows the investor to take advantage of the risk/reward tradeoff and benefit from both growth and income. Here are the basic steps to asset allocation: 1. Choosing which asset classes to include (stocks, bonds, money market, real estate, precious metals, etc.) 2. Selecting the ideal percentage (the target) to allocate to each asset class 3. Identifying an acceptable range within that target 4. Diversifying within each asset class Risk Tolerance The client's risk tolerance is the single most important factor in choosing an asset allocation. At times, there may be a distinct difference between the risk tolerance of a client and his/her spouse, so care must be taken to get agreement on how to proceed. Also, risk tolerance may change over time, so it's important to revisit the topic periodically. Time Horizon Clearly, the time horizon for each of the client's goals will affect the asset allocation mix. Take the example of a client with a very aggressive risk tolerance. The recommended allocation to stocks will be much higher for the client's retirement portfolio than for the money being set aside for the college fund of the client's 13-year-old child.

STRATEGIC VS TACTICAL ASSET ALLOCATION Strategic asset allocation calls for setting target allocations and then periodically rebalancing the portfolio back to those targets as investment returns skew the original asset allocation percentages. The concept is akin to a "buy and hold" strategy, rather than an active trading approach. Of course, the strategic asset allocation targets may change over time as the client's goals and needs change and as the time horizon for major events such as retirement and college funding grow shorter. Tactical asset allocation allows for a range of percentages in each asset class (such as Stocks = 40-50%). These are minimum and maximum acceptable percentages that permit the IA to take advantage of market conditions within these parameters. Thus, a minor form of market timing is possible, since the investor can move to the higher end of the range when stocks are expected to do better and to the lower end when the economic outlook is bleak. Diversification

Once the target asset allocation percentages have been defined, the next step is to diversify. For example, within the bond or fixed-income class, investment options include corporate bonds, government bonds, municipal bonds, and so on. Further choices within the corporate bond category alone include short-term vs. long-term, investment-grade vs. highyield (or junk) bonds, convertible, etc. The range of options for stocks or stock funds is even wider. The information below refers to both individual stocks and mutual funds:

Market capitalization - market cap simply refers to the value of all of a company's outstanding common shares times the current market price. Stocks are classified based on size as follows:
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Large-cap stocks$5 billion or more Mid-cap stocks$1 billion - $5 billion Small-cap stocksless than $1 billion Micro-cap stocksless than $50 million

Diversifying across stocks with different market capitalizations is recommended. Typically, a larger allocation is made to large-cap stocks and smaller percentages to small-cap or midcap stocks.

Growth vs. value - stocks also differ by style. Typically, stocks (and mutual funds) are categorized as either growth or value oriented. Both styles have advocates who believe one is likely to outperform the other for different reasons.
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Growth stocks are those whose earnings have been higher than average in the past and are expected to continue at a higher than average rate in the future. They typically pay low or no dividends and often trade at high P/E ratios. They tend to do well when the overall market is rising.

Value stocks generally have a strong balance sheet and higher dividends and are undervalued in the market given their earnings and asset values. Value stocks tend to outperform growth stocks during a falling market.

As in other contexts, diversification helps to reduce risk in a portfolio. Since different types of stocks have different characteristics, their rates of return will differ throughout the economic cycle. For example, if a portfolio is composed of 50% stocks, and a largecap stock fund is the only investment, it may perform better during a downturn in the market than a small-cap fund, but the small-cap may outperform the large-cap during a market rally.

ACTIVE vs. PASSIVE PORTFOLIO There are two basic approaches to investment management:

Active asset management is based on a belief that a specific style of management or analysis can produce returns that beat the market. It seeks to take advantage of inefficiencies in the market and is typically accompanied by higher than average costs (for analysts and managers who must spend time to seek out these inefficiencies).

Passive asset management is based on the concept that markets are efficient, that market returns cannot be surpassed regularly over time, and that low cost investments held for the long-term will provide the best returns.

For those who favor an active management approach, stock selection is typically based on one of two styles:

Top-down - managers who use this approach start by looking at the market as a whole, then determine which industries and sectors are likely to do well given the current economic cycle. Once these choices are made, they then select specific stocks based on which companies are likely to do best within a particular industry.

Bottom-up - this approach ignores market conditions and expected trends. Instead, companies are evaluated based on the strength of their financial statements, product pipeline, or some other criteria. The idea is that strong companies are likely to do well no matter what market or economic conditions prevail.

Passive management concepts to know include: Efficient market theory - this theory is based on the idea that information that impacts the markets (such as changes to company management, Fed interest rate announcements, etc.) is instantly available and processed by all investors. As a result, this information is always taken into account in market prices. Those who believe in this theory believe that there is no way to consistently beat market averages.

Indexing - one way to take advantage of the efficient market theory is to use index funds (or create a portfolio that mimics a particular index). Since index funds tend to have lower than average transaction costs and expense ratios, they can provide an edge over actively managed funds which tend to have higher costs.

TYPES OF SALES AND THE PROCESS OF UNDERWRITING5


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The two most common ways of issuing debt through bonds by state and local governments are by competitive bidding or by negotiated sales. In both kinds of sales, the underwriters work closely with traders and sales persons to determine the price of a new issue. New issues of municipal bonds are sometimes sold through private placements. In private placements, issuers may sell the bonds directly to investors or through a placement agent. Laws may have restrictions on the type of sale allowed by localities. For example, general obligation bonds are often required by law to be sold competitively. Both types of sales can also be done by a syndicate, that is, a group of underwriters comprising a lead manager and co-managers. Syndicates include underwriters from competing firms who agree to bid together for an issue. The syndicate determines the pricing and distribution of the issue. The lead manager is responsible for coordinating the deal. For both competitive and negotiated sales, there are often requirements related to advertising the sale of the bonds and the circulation of a disclosure document. Competitive Sales In a competitive sale, underwriters submit a sealed bid for purchasing the bonds to the issuer at a specific time on a specified date. In this system, there will normally be more than one bidder. The bidder offering the lowest true interest cost to the issuer (i.e., interest cost that takes into account the time value of money) will be awarded the bid. If the competitive bid involves a syndicate, the syndicate's bid must meet all the published requirements of the issue and arrange for a good faith deposit if that is required. The winning bid becomes the contract of sale for the offering. After the syndicate purchases the bonds, it resells them to retail investors. The underwriter essentially acts as the intermediary between the issuer and the initial investor. A competitive sale is also called an advertised sale or a sealed bid sale. In a competitive bid or sale, once the issuer has structured an offering and completed relevant legal, financial and other tasks, an official notice of sale that serves as the advertising document is usually published in the Bond Buyer, the national trade newspaper of the industry and in other national and local publications. Legal requirements for advertising at the local level often pertain to matters such as a specified time frame in which the bonds or notes must be advertised prior to a sale. Notice of the sale is also sent out to potential bidders. The notice of sale includes information such as the amount of debt or bonds being issued, the structure of the deal, the type of debt or bonds, the time and place of sale, the name of the counsel and bidding specifications.

In addition, full disclosure requirements stipulate that information on the potential risk to investors be provided through documents such as an official statement. The Government Finance Officers Association provides guidelines for disclosure, though as a largely unregulated over the counter market, there are no specific disclosure requirements for bonds sold through this system. Negotiated Sales In a negotiated sale, the issuer selects the underwriter (or underwriters in the case of a syndicate) prior to the public sale date. The issuer may select co-managers from competing firms to work as part of a syndicate. The lead underwriter or manager coordinates the deal. The first step in a negotiated sale is a Request for Proposals (RFP) that is sent out by the issuer to selected underwriters. The RFP specifies the selection criteria that form the basis of evaluating the proposals/responses that will be submitted by the underwriters in response to the RFP. Among other things, a request information on the firm's experience with underwriting the type of issue being considered, resumes of key personnel and their time commitment for the proposed issuance, management fees and estimated expenses, list of anticipated services, and preliminary ideas about the structure of the deal. The selection process also involves interviews of key players, such as public investment bankers and underwriters, who have to defend their proposed roles and strategies in planning and executing the deal. The underwriter selected in a negotiated sale has the exclusive right to purchase the bonds at agreed upon prices. The managers set a preliminary pricing schedule that may be revised upward or downward. They may also set a final price on the day of the sale. The managers in a negotiated sale will make an offer to purchase the bonds from the issuer at a price that will incur the lowest interest cost for the issuer but at the same time be salable to investors. Negotiated sales may be more cost effective if the issuer has the necessary expertise to negotiate with underwriters. A negotiated sale can be a cooperative effort between the issuer and the underwriter for structuring a deal with reasonable terms. Private Placements Private placements are direct transactions between the issuer and investors, i.e., the bonds are sold directly by the issuer to investors without an underwriter. In this process, instead of underwriters, placement agents act as intermediaries between the issuer and investors. However, they do not assume any underwriting risks. In recent years, some issuers have bypassed placement agents and have done private placements directly with

ultimate investors. This kind of private placement is called a direct purchase. The Relative Advantages and Disadvantages of Each Type of Sale Even if there are no requirements relating to state or local statutes governing the sale of bonds, one type of sale may be preferred over others depending on the kind of transaction. Issuers usually choose one method over the others based on which will yield the lowest all-in borrowing cost. Proponents of competitive sales argue that in this type of sale underwriters offer the most competitive or lowest prices in order to increase their probability of winning the bid. Since this kind of bidding process is open to all underwriters and the lowest price serves as the only criterion for awarding the bid, it is a fairer method that is better able to avoid allegations of preferential treatment. Competitive sales, however, often work to the advantage of better-known established underwriters with higher credit ratings. Competitive bids are also favored for deals with simple bond structures or when the security is strong and predictable, as in the case of general obligation bonds. On the other hand, proponents of negotiated sales argue that this type of transaction works better and results in lower borrowing costs because it allows for more flexibility in timing sales, provides more information to investors, gives the opportunity for pre-marketing, and is able to better customize structures and maturities for targeted investors. Negotiated sales tend to work better when the bond issue is more complex and the underwriters are not as well established. An issuer may prefer a private placement if it does not have an established credit history, or if the bonds issued is of lower grade. Private placements are often preferred by issuers because financial and other information about the issuer is disclosed to direct investors only and not disseminated to the public or competitors.

ISSUES IN THE MUNICIPAL BOND UNDERWRITING BUSINESS Aside from issues of cost, there are political considerations. Negotiated sales create a possibility for underwriters to use campaign contributions and connections to obtain deals on terms that may not be in the best interest of the public. Concerns about influence-peddling were at the center of investigations of the bond market conducted by the Securities and Exchange Commission in the early 1990s. The investigations involved a range of issues, including:

Pay-to-play (through which underwriting firms make political contributions to get underwriting deals) Conflicts of interest (whether persons associated with municipal issuers have

relations with underwriting firms)


Inadequate disclosure Lack of price transparency and excessive markups in bond prices Questionable sales practices

In its initial information seeking efforts, the SEC found that most firms made significant political contributions and that those that were making contributions were usually the same ones that were seeking municipal business.

GROUP 9 INITIAL PUBLIC OFFERING

I. II.

III.

Brief History of IPO Initial Public Offering (IPO) a. What is an IPO b. Advantages and Disadvantages of IPO c. IPO vs. FPO and SPO / Secondary Distribution d. IPO Procedure e. IPO Pricing f. Role of SEC in IPO Importance of IPO in Corporate Finance and in the Philippine Economy

Brief History of IPO

The earliest form of a company which issued public shares was the publicani during the Roman Republic. Like modern joint-stock companies, the publicani were legal bodies independent of their members whose ownership was divided into shares, or partes.

There is evidence that these shares were sold to public investors and traded in a type of over-the-counter market in the Forum, near the Temple of Castor and Pollux. The shares fluctuated in value, encouraging the activity of speculators, or quaestors. No evidence remains of the prices for which partes were sold, the nature of initial public offerings, or a description of stock market behavior. Publicanis lost favor with the fall of the Republic and the rise of the Empire.

In March 1602 the Vereinigde Oost-Indische Compagnie (VOC), or Dutch East India Company was formed. The VOC was the first modern company to issue public shares, and it is this issuance, at the beginning of the 16th century, that is considered the first modern IPO. The company had an original paid-up share capital of 6,424,588 guilders. The ability to raise

this large sum is attributable to the decision taken by the owners to open up access to share ownership to a wide public.

Everyone living in the United Provinces had an opportunity to participate in the Company. Each share was worth 3000 guilders (roughly equivalent to US$1,500). All the shares were tradable, and the shareholders received receipts for the purchase. A share certificate documenting payment and ownership such as we know today was not issued but ownership was instead entered in the companys share register.

In the United States, the first IPO was the public offering of Bank of North America.

What is an IPO

Initial Public Offering (IPO) or Stock Market Launch is a type of public offering where shares of stock in a company are sold to the general public, on a securities exchange, for the first time.

Through this process, a private company transforms into a public company.

Initial public offerings are used by companies to raise expansion capital, to possibly monetize the investments of early private investors, and to become publicly traded enterprises.

The first sale of stock by a private company to the public. IPOs are often issued by smaller, younger companies seeking the capital to expand, but can also be done by large privately owned companies looking to become publicly traded. In an IPO, the issuer obtains the assistance of an underwriting firm, which helps it determine what type of security to issue (common or preferred), the best offering price and the time to bring it to market. Also referred to as a "public offering."

IPOs can be a risky investment. For the individual investor, it is tough to predict what the stock will do on its initial day of trading and in the near future because there is often little historical data with which to analyze the company.

Most IPOs are of companies going through a transitory growth period, which are subject to additional uncertainty regarding their future values.

Primary Purpose of IPO 1. To increase capital in a cost-effective way because it allows business expansion without increasing borrowings or draining the companys cash reserves; 2. To improve the companys profits and increase the potential for mergers or acquisitions; 3. To comply with the requirements of some laws for some sectors (e.g., BOI-registered enterprises, oil-refinery businesses, and telecommunication companies). Advantages of IPO Increased cash and long-term capital Increased market value Mergers/Acquisitions Growth strategies Ability to attract and keep key personnel Increased prestige/reputation

Increased cash and long-term capitalFunds are obtained to support growth, increase working capital, invest in plant and equipment, expand research and development, and retire debt, among other goals. Increased market valueThe value of public companies tends to be higher than that of comparable private companies due in part to increased liquidity, available information, and a readily ascertainable value. Mergers/AcquisitionsThese activities may be achieved with stock consideration and thus conserve cash. Growth strategiesShareholders may achieve improved liquidity and greater shareholder value. Subject to certain restrictions and practical market limitations, shareholders may, over time, sell their stock in the public market. Alternatively, existing stock may be used as collateral to secure personal loans. Ability to attract and keep key personnelIf a company is publicly owned, employee incentive and benefit plans are usually established in the form of stock ownership arrangements to attract and keep key personnel. Stock option plans, for example, may be more attractive to officers and other key personnel than generous salary arrangements due to the significant upside potential.

Increased prestige/reputationThe visibility for shareholders and their company is usually enhanced. For example, a regional company may more easily expand nationally following a stock offering due to the increased visibility.

Disadvantages of IPO Increased expenses Ongoing expenses Loss of control Loss of privacy Pressure for performance Restrictions on insider sales Investor relations No turning back Vulnerability to hostile takeovers Litigation risk

Increased expensesMany factors play a role in determining the cost of an IPO, but in all cases the costs of going public are significant. These costs will generally include underwriting fees (generally 5-7 percent of the gross proceeds), fees related to legal and accounting advisors, and printing costs. In addition, there are other fees such as the SEC filing fee, the exchange listing fee (NASDAQ or NYSE), and any Blue Sky filing fees. Most expenses directly related to the offering in a complete IPO are reflected as an offset to the proceeds received and a reduction of additional paid-in-capital. IPO start-up costs are therefore not expensed in the statement of operations. However, if the IPO is not completed, such costs are generally expensed. Ongoing expensesPublic companies are required to report and certify financial information on a quarterly and annual basis. There will be ongoing expenses related to these changes such as the expense of independent auditors. Administrative and investor relations costs include those related to quarterly reports, proxy materials, annual reports, transfer agents, and public relations. A public company will now be paying premiums for directors and officers liability insurance as well. Furthermore, compliance-related costs could also increase primarily in relation to the Sarbanes-Oxley 404 certification requirements.

Loss of controlIf more than 50 percent of a companys shares are sold to just a few outside individuals, the original owners could lose control of the company. If, however, the shares held by the public are widely distributed, management and the board of directors may maintain effective control, even though they own less than 50 percent of the shares. Many companies structure their offerings so that after an initial offering, the founder(s) still has control, and after subsequent offerings the entire management team maintains control. Loss of privacyThe registration statement and subsequent reporting require disclosure of many facets of a companys business, operations, and finances that may never before have been known outside the company. Some sensitive areas of disclosure that will be available to competitors, customers, and employees include: 1) extensive financial information (e.g., financial position, sales, cost of sales, gross profit, net income, business segment data, related-party transactions, borrowings, cash flows, major customers, and assessment of internal controls); 2) the compensation of officers and directors, including cash compensation, stock option plans, and deferred compensation plans; and 3) the security holdings of officers, directors, and major shareholders (insiders). Pressure for performanceIn a private company, the business owner/manager is free to operate independently. However, once the company becomes publicly owned, the owner acquires as many partners as the company has shareholders and is accountable to all of them. Shareholders expect steady growth in areas such as sales, profits, market share, and product innovation. Thus, in a publicly held company, management is under constant pressure to balance short-term demands for growth with strategies that achieve long-term goals. The inability to meet analysts expectations of short-term earnings can dramatically hurt the marketplaces longterm valuation of a company. 11 Roadmap for an IPO | A guide to going public Restrictions on insider salesStock sales by insiders are usually limited. Most underwriters require that a companys existing shareholders enter into contractual agreements to refrain from selling their stock during a specified time following the IPO, typically 180 days. This is called the lock-up period. Investor relationsInvestors inquiries, investment-community presentations, and printing and distributing quarterly and annual financial reports require a significant time commitment by management. They often also require additional personnel or public relations resources. No turning backThe IPO process is essentially one-way. Taking a company private can be difficult and costly. Vulnerability to hostile takeoversHaving publicly traded shares reduces the companys ability to control its ownership and exposes it to unsolicited acquisition threats. Litigation riskBeing public increases a companys exposure to shareholder lawsuits, particularly since Sarbanes-Oxley was passed. IPO Transaction Costs Among the major expenses of an IPO are:

(1) Issue manager, underwriting and selling and/or issue management fees; (2) Legal counsel and/or legal advisers fees; (3) Reporting accountants fee and receiving or agency fee; (4) Asset appraiser s fee and auditors fee; (5) Promotion and publications expenses; (6) Administration and sundry expenses; and (7) PDTC Fee.

The cost of an IPO normally depends on the size of the issue and the level of the marketing effort.

LAWS ON THE IPO TAX Law RA No. 7717 Tax Base Gross selling price or gross value in money of shares of stocks sold, bartered, exchanged or otherwise disposed in accordance with the proportion of stocks sold, bartered or exchanged or after listing in the stock exchange. Tax Rate Effectivity Date Approved: May 5, 1994 Effective: May 28, 1994 33% or below Over 33% but below 50% Over 50% 4% 2% 1% RA No. 8424 Gross selling price or gross value in money of shares of stocks sold, bartered, exchanged or otherwise disposed in accordance with the proportion of stocks sold, bartered or exchanged or after listing in the stock exchange. Approved: December 11, 1997 Effective:

Up to 25% Over 25% but not over 33% Over 33% 4% 2% 1%

January 1, 1998

Aside from the IPO tax, IPO transactions are also subject to various fees and charges imposed by the Securities and Exchange Commission (SEC) and the PSE.

1. Listing Fees for IPOs SCHEDULE OF LISTING FEES Type First Board and Second Board SME Board P20,000 plus other incidental expenses. P50,000 If the company fails to pay within the prescribed period, a surcharge of 25% plus 1% interest (based on the listing fee) for everyday of delay shall be imposed. (Note: This is also applicable to the First and Second Boards for IPOs and Listings by way of introduction.)

Processing P50,000 plus other incidental Fee expenses. Initial First P15 billion: 1/10 of 1% or

Listing Fee P500,000 whichever is higher. In excess of P15 billion: P15 million plus 1/20 of 1% of excess over P15 million.

2. Annual Listing Maintenance Fee An annual listing maintenance fee (ALMF) is charged each listed company where the rate depends on the companys market capitalization. The ALMF is exclusive of the VAT. First Board and Second Board 1/100 of 1% of market capitalization but in P100 for every P1 million market capitalization of no case to be less than P250,000 nor more listed shares as of the last trading day of the than P2 million for each listed company. immediately preceding year, but in no case shall it be less than P50,000 nor more than P250,000. 3. SEC Fee SME Board

The Exchange collects from each of the buying and selling stockbroker a fee of 1/200 of 1% of gross value (excluding taxes and other fees) to be transmitted to the SEC. 4. Philippine Depository and Trust Corporation (PDTC) Fee

The PDTC charges a depository maintenance fee of 0.01% per annum or 0.0008333% per month based on the market value of holdings as of month-end effective May 1, 2005. 5. Brokerage Commission

A stockbroker is compensated for his/her services in executing orders on the Exchange through commission charges, which are paid by both the buyer and seller to their respective brokers. The minimum commission rates depend on the amount of the transaction. Transaction Value P100 million and below Above P100 million up to P500 million Above P500 million up to P1 billion Above P1 billion up to P5 billion Above P5 billion up to P10 billion Above P10 billion 6. Other Expenses Minimum Commission 0.0025 + 12% VAT 0.0015 but not less than P250,000 + 12% VAT 0.00125 but not less than P750,000 + 12% VAT 0.001 but not less than P1.25 million + 12% VAT 0.00075 but not less than P5 million + 12% VAT 0.0005 but not less than P7.5 million + 12% VAT

All other incidental expenses borne by the Exchange in the conduct of its due diligence in processing the application of the applying company shall be charged to the latter.

IPO vs. FPO Initial Public Offering (IPO) Refers to the initial launch of a company's stock, and it is brought out for the first time.

Follow on Public Offer (FPO) Pertains to the companies that are already listed on exchange but want to raise funds, upon SEC approval, by issuing some more equity shares.

SPO / Secondary Distribution Secondary Public Offering (SPO) Also called a secondary distribution, a secondary offering is distinguished from an initial public offering (or IPO) in that the proceeds generated by the sale of the shares goes to the shareholder rather than the issuing company. The selling shareholder originally paid for the shares in return for the equity. In the case of a secondary offering, that shareholder is simply reselling the shares in the market. In this sense, he is recouping the money he originally paid the issuing company in return for the shares.

*For example, suppose Bob fully owns half of the total number of outstanding shares of company XYZ. Bob originally purchased these from XYZ at the time of their IPO. The proceeds generated from that IPO went to XYZ as the issuer. Bob now decides, however, that it would be beneficial for him to sell all of his XYZ shares in the market. This sale constitutes a secondary offering; because it is the second time those shares have been for sale in the market. The money he makes from the sale of his XYZ shares benefits him as well as the previous owner.

Ayala Corp. says shareholder Mermac's stake cut to 51% MANILA (XFN-ASIA) - Ayala Corp said its majority shareholder, Mermac Inc, has reduced its stake in the conglomerate to 51 pct after selling a total of 23.8 mln common shares, equivalent to 6.9 pct of outstanding shares, to various investors at 443 pesos per share. In a statement, it said Mermac chairman Jaime Zobel de Ayala has assured all the stakeholders of Ayala Corp that the sale would not result in any change in the governance structure of the conglomerate. Mermac is owned by the Zobel de Ayala family. ''The decision to sell the shares is part of a portfolio rearrangement exercise,'' Ayala Corp said. ''The sale takes into consideration the need to increase the public float of Ayala in view of heightened investor interest and demand for the shares as Ayala, through its portfolio of businesses, offers a good exposure to the predicted upturn in the economy.''

IPO Procedure

IPO Pricing Bookrunner a lead manager appointed by a company planning an IPO to help it arrive at an appropriate price at which the shares should be issued

Ways Price of IPO is determined Fixed Price Method fix a price with the help of its lead managers Book Building determine the price through analysis of confidential investor demand data compiled by the bookrunner

IPO Pricing Underpricing IPO underpricing, is the increase in stock value from the initial offering price to the first-day closing price.

Many believe that underpriced IPOs leave money on the table for corporations, but some believe that underpricing is inevitable. Investors state that underpricing signals high interest to the market which increases the demand. On the other hand, overpriced stocks will drop long-term as the price stabilizes so underpricing may keep the issuers safe from investor litigation.

Historically, some IPOs both globally and in the United States have been underpriced. The effect of "initial underpricing" an IPO is to generate additional interest in the stock when it first becomes publicly traded.

Flipping, or quickly selling shares for a profit, can lead to significant gains for investors who have been allocated shares of the IPO at the offering price. However, underpricing an IPO results in lost potential capital for the issuer.

One extreme example is theglobe.com IPO which helped fuel the IPO "mania" of the late 90's internet era. Underwritten by Bear Stearns on November 13, 1998, the IPO was priced at $9 per share. The share price quickly increased 1000% after the opening of trading, to a high of $97. Selling pressure from institutional flipping eventually drove the stock back down, and it closed the day at $63. Although the company did raise about $30 million from the offering it is estimated that with the level of demand for the offering and the volume of trading that took place the company might have left upwards of $200 million on the table.

IPO Pricing Overpricing The danger of overpricing is also an important consideration. If a stock is offered to the public at a higher price than the market will pay, the underwriters may have trouble meeting their commitments to sell shares. Even if they sell all of the issued shares, the stock may fall in value on the first day of trading. If so, the stock may lose its marketability and hence even more of its value. This could result in losses for investors, many of whom being the most favored clients of the underwriters.

Underwriters, therefore, take many factors into consideration when pricing an IPO, and attempt to reach an offering price that is low enough to stimulate interest in the stock, but high enough to raise an adequate amount of capital for the company. The process of determining an optimal price usually involves the underwriters ("syndicate") arranging share purchase commitments from leading institutional investors.

Some researchers (e.g. Geoffrey C., and C. Swift, 2009) believe that the underpricing of IPOs is less a deliberate act on the part of issuers and/or underwriters, than the result of an over-reaction on the part of investors (Friesen & Swift, 2009). One potential method for determining underpricing is through the use of IPO Underpricing Algorithms.

IPO Pricing - IPO Underpricing Algorithms Underwriters and investors and corporations going for an initial public offering (IPO), issuers, are interested in their market value. There is always tension that results since the underwriters want to keep the price low while the companies want a high IPO price.

Underpricing may also be caused by investor over-reaction causing spikes on the initial days of trading. The IPO pricing process is similar to pricing new and unique products where there is sparse data on market demand, product acceptance, or competitive response. Thus it is difficult to determine a clear price which is compounded by the different goals issuers and investors have.

The problem with developing algorithms to determine underpricing is dealing with noisy, complex, and unordered data sets. Additionally, people, environment, and various environmental conditions introduce irregularities in the data. To resolve these issues, researchers have found various techniques from Artificial ntelligence that normalizes the data.

Artificial neural networks (ANNs) resolves these issues by scanning the data to develop internal representations of the relationship between the data. By determining the relationship over time, ANNs are more responsive and adaptive to structural changes in the data. There are two models for ANNs: supervised learning and unsupervised learning. In supervised learning models, there are tests that are needed to pass to reduce mistakes. Usually, when mistakes are encountered i.e. test output does not match test input, the algorithms use back propagation to fix mistakes. Whereas in unsupervised learning models, the input is classified based on which problems need to be resolved.

Chou discusses their algorithm for determining the IPO price of Baidu. They have a three layer algorithm which containsinput level, hidden level, and output level: Input level, the data is received unprocessed. Hidden level, the data is processed for analyses Output level, the data goes through a sigmoid transition function They reduce the amount of errors by trying to find the best route and weight through the neural network which is an evolutionary algorithm.

Evolutionary programming is often paired with other algorithms e.g. ANN to improve the robustness, reliability, and adaptability. Evolutionary models reduce error rates by allowing the numerical values to change within the fixed structure of the program. Designers provide their algorithms the variables, they then provide training data to help the program generate rules defined in the input space that make a prediction in the output variable space.

In this approach, the solution is made an individual and the population is made of alternatives. However, the outliers cause the individuals to act unexpectedly as they try to create rules to explain the whole set.

Rule-based system For example, Quintana first abstracts a model with 7 major variables. The rules evolved from the Evolutionary Computation system developed at Michigan and Pittsburgh:

Underwriter prestige, Price range width, Price adjustment, Offering price, Retained stock, Offering size, Technology

Quintana uses these factors as signals that investors focus on. The algorithm his team explains shows how a prediction with a high-degree of confidence is possible with just a subset of the data.

Underwriter prestige Is the underwriter prestigious in role of lead manager? 1 for true, 0 otherwise. Price range width The width of the non-binding reference price range offered to potential customers during the roadshow. This width can be interpreted as a sign of uncertainty regarding the real value of the company and a therefore, as a factor that could influence the initial return. Price adjustment The difference between the final offer price and the price range width. It can be viewed as uncertainty if the adjustment is outside the previous price range. Offering price The final offer price of the IPO Retained stock Ratio of number of shares sold at the IPO divided by post-offering number of shares minus the number of shares sold at the IPO. Offering size Logarithm of the offering size in millions of dollars excluding the overallotment option Technology Is this a technology company? 1 for true, 0 otherwise.

Two-layered evolutionary forecasting Luque approaches the problem with outliers by performing linear regressions over the set of data points (input, output). The algorithm deals with the data by allocating regions for noisy data. The scheme has the advantage of isolating noisy patterns which reduces the effect outliers have on the rule-generation system. The algorithm can come back later to

understand if the isolated data sets influence the general data. Finally, the worst results from the algorithm outperformed all other algorithms' predictive abilities.

Agent-based modelling Currently, many of the algorithms assume homogeneous and rational behavior among investors. However, theres an alternative approach being researched to financial modeling called agent-based modelling (ABM). ABM uses different autonomous agents whose behavior evolves endogenously which lead to complicated system dynamics that are sometimes impossible to predict from the properties of individual agents. ABM is starting to be applied to computational finance. Though, for ABMs to be more accurate, better models for rule-generation need to be developed.

Role of SEC in IPO PSE has committed itself to: (a) protecting the interest of the investing public; and (b) developing and maintaining an efficient, fair, orderly and transparent market.

Importance of IPO 1. 2. 3. 4. 5. 6. To access capital markets to raise money for the expansion of operations To acquire other companies with publicly traded stock as the currency To attract and retain talented employees To diversify and reduce investor holdings To provide liquidity for shareholders To improved perceptions of your business and brand with customers, suppliers and employees

Many fast-growing, private businesses see an IPO as an excellent route to accelerating growth and a step towards achieving market leadership. A successful listing on one of the worlds capital markets, while always the culmination of months or years of hard work can provide benefits such as: -access to financing to complete a strategic acquisition -opportunities to expand your business into new markets -an exit opportunity for your private equity or other investors -improved perceptions of your business and brand with customers, suppliers and employees

An IPO marks a turning point in the life of a company. Exceptional enterprises dont view an IPO as simply a financial transaction, bur rather, recognize it as a complex transformation from private to public and start their IPO journey well-informed and well-prepared.

BIBLIOGRAPHY This bubble world: The origins of Financial Speculation (http://www.washingtonpost.com/wpsrv/style/longterm/books/chap1/deviltakethehindmost.htm)

The Origins of Value The Financial Innovations that Created Modern Capital Markets

Exhibits - America's First IPO - Museum of American Finance Moaf.org. Retrieved 2012-07-12.

investopedia.com http://www.investopedia.com/terms/i/ipo.asp#ixzz22fd49d1N http://www.investopedia.com/terms/i/ipo.asp#ixzz22fdQXu85

IPO - The Initial Public Offerings (IPO) Resource Page http://bear.warrington.ufl.edu/ritter/iporefs/ipopage.html

NTRC Tax Research Journal, National Tax Research Center Volume XXIII.1

lastbull.com one of the best blogs on Stock market information

IPO Guide Seventh Edition, Bochner & Avina

wikepedia.org http://en.wikipedia.org/wiki/Initial_public_offering

http://en.wikipedia.org/wiki/IPO_Underpricing_Algorithms

tripod.com http://fglinc.tripod.com/knowstockex.htm

Price Water House Coopers, Roadmap for an IPO A guide to going public http://www.ey.com/PH/en/Services/Strategic-Growth Markets/SGM_IPO_Overview

The Wall Street Journal Quarterly Markets Review http://online.wsj.com/article/SB10001424052748704559904576230753726146680.html

The Wall Street Journal November 17, 2010, 2:06 PM http://blogs.wsj.com/deals/2010/11/17/how-gms-ipo-stacks-up-against-the-biggest-ipos-onrecord/

howstuffworks.com http://money.howstuffworks.com/10-biggest-ipos1.htm http://money.howstuffworks.com/10-biggest-ipos2.htm

AB Capital, Securities Underwriting http://www.abcapitalonline.com/trackrec.htm

GROUP 10 ANTI-MONEY LAUNDERING ACT Rationale for Enacting the Law The Philippines, while striving to sustain economic development and poverty alleviation through, among others, corporate governance and public office transparency, must contribute its share and play a vital role in the global fight against money laundering. Hence, the compelling need to enact responsive anti-money laundering legislation in order to establish and strengthen an anti-money laundering regime in the country which will not only

increase investors confidence but also ensure that the Philippines is not used as a site to launder proceeds of unlawful activities. History of the Act -Republic Act No. 9160 otherwise known as The Anti-Money Laundering Act of 2001 was signed into law on September 29, 2001and took effect on October 17, 2001. -The Implementing Rules and Regulations took effect on April 2, 2002. -On March 7, 2003, R.A. No. 9194 (An Act Amending R.A. No. 9160) was signed into law and took effect on March 23, 2003. -The revised Implementing Rules and Regulations took effect on September 7, 2003. -on June 18, 2012, RA 10167 was approved. Amending section 10 and 11 of RA no. 9194. Salient Features Criminalizes money laundering Creates a financial intelligence unit Imposes requirements on customer identification, record keeping and reporting of covered and suspicious transactions Relaxes strict bank deposits secrecy laws Provides for freezing/seizure/forfeiture/recovery of dirty money/property Provides for international cooperation Money Laundering is a crime whereby the proceeds of an unlawful activity as defined in the AMLA are transacted or attempted to be transacted to make them appear to have originated from legitimate sources. Its official definition, provided by Atty. Richard Funk of AMLC (Anti-Money Laundering Council) in a seminar hosted by the PhilSecC, is: It covers all procedures to change, obscure or conceal the beneficial ownership of audit trail of illegally obtained money or valuables so that it appears to have originated from a legitimate source; and it is a process through which the existence of an illegal source of unlawful application of illicit gains is concealed or disguised to make gains legitimate, thereby helping to evade detection, prosecution, seizure and taxation. More simply, money laundering is basically a way through which dirty money is washed so that after a cycle of laundering it comes out clean or legal. Money Laundering Offenses and Penalties Knowingly transacting or attempting to transact any monetary instrument/property which represents, involves or relates to the proceeds of an unlawful activity. Penalty is 7 to 14 years imprisonment and a fine of not less than P3M but not more than twice the value of the monetary instrument/property. Knowingly performing or failing to perform an act in relation to any monetary instrument/property involving the proceeds of any unlawful activity as a result of which he facilitated the offense of money laundering. Penalty is 4 to 7 years imprisonment and a fine of not less than P1.5M but not more than P3M. Knowingly failing to disclose and file with the AMLC any monetary instrument/property required to be disclosed and filed. Penalty is 6 months to 4 years imprisonment or a fine of not less than P100,000 but not more than P500,000, or both.

Unlawful Activity is the offense which generates dirty money. It is commonly called the predicate crime. It refers to any act or omission or series or combination thereof involving or having direct relation to the following: Predicate Crimes/Unlawful Activities Kidnapping for ransom Drug trafficking and related offenses Graft and corrupt practices Plunder Robbery and Extortion Jueteng and Masiao Piracy Qualified theft Swindling Smuggling Violations under the Electronic Commerce Act of 2000 Hijacking; destructive arson; and murder, including those perpetrated by terrorists against non-combatant persons and similar targets Fraudulent practices and other violations under the Securities Regulation Code of 2000 Felonies or offenses of a similar nature that are punishable under the penal laws of other countries. Other Offenses/Penalties Failure to keep records is committed by any responsible official or employee of a covered institution who fails to maintain and safely store all records of all transactions of said institution, including closed accounts, for five (5) years from the date of the transaction/closure of the account. Penalty is 6 months to 1 year imprisonment or a fine of not less than P100,000 but not more than P500,000, or both. Malicious reporting is committed by any person who, with malice or in bad faith, reports/files a completely unwarranted or false information relative to money laundering transaction against any person. Penalty is 6 months to 4 years imprisonment and a fine of not less than P100,000 but not more than P500,000, at the discretion of the court. The offender is not entitled to avail the benefits of the Probation Law. If the offender is a corporation, association, partnership or any juridical person, the penalty shall be imposed upon the responsible officers, as the case may be, who participated in, or allowed by their gross negligence, the commission of the crime. If the offender is a juridical person, the court may suspend or revoke its license. If the offender is an alien, he shall, in addition to the penalties prescribed, be deported without further proceedings after serving the penalties prescribed. If the offender is a public official or employee, he shall, in addition to the penalties prescribed, suffer perpetual or temporary absolute disqualification from office, as the case may be. Breach of confidentiality. When reporting covered or suspicious transactions to the AMLC, covered institutions and their officers/employees are prohibited from communicating directly or indirectly, in any manner or by any means, to any person/entity/media, the fact that such report was made, the contents thereof, or any other information in relation thereto. In case of violation thereof, the concerned official and employee of the covered institution shall be criminally liable. Neither may such

reporting be published or aired in any manner or form by the mass media, electronic mail or other similar devices. In case of a breach of confidentiality published or reported by media, the responsible reporter, writer, president, publisher, manager and editor-in-chief shall also be held criminally liable. Penalty is 3 to 8 years imprisonment and a fine of not less than P500,000 but not more than P1M. Covered Institutions Covered Institutions are those mandated by the AMLA to submit covered and suspicious transaction reports to the AMLC. These are: Banks and all other entities, including their subsidiaries and affiliates, supervised and regulated by the Bangko Sentral ng Pilipinas Insurance companies and all other institutions supervised or regulated by the Insurance Commission Securities dealers, pre-need companies, foreign exchange corporations and other entities supervised or regulated by the Securities and Exchange Commission Covered & Suspicious Transactions Covered transactions are single transactions in cash or other equivalent monetary instrument involving a total amount in excess of Five Hundred Thousand (P500,000) Pesos within one (1) banking day Suspicious transactions are transactions with covered institutions, regardless of the amounts involved, where any of the following circumstances exists: there is no underlying legal/trade obligation, purpose or economic justification; the client is not properly identified; the amount involved is not commensurate with the business or financial capacity of the client; the transaction is structured to avoid being the subject of reporting requirements under the AMLA; there is a deviation from the clients profile/past transactions; the transaction is related to an unlawful activity/offense under the AMLA; and transactions similar or analogous to the above. Freezing of Monetary Instrument or Property The Court of Appeals, upon application ex parte (without notice to the other party) by the AMLC and after determination that probable cause exists that any monetary instrument or property is in any way related to an unlawful activity, may issue a freeze order which shall be effective immediately. The freeze order shall be for a period of 20 days unless extended by the court. Authority to Inquire into Bank Deposits Notwithstanding the provisions of R.A. No. 1405, as amended, R.A. No. 6426, as amended, R.A. No. 8791, and other laws, the AMLC may inquire into or examine any particular deposit or investment with any banking institution or non-bank financial institution upon order of any competent court in cases of violation of this act when it has been established that there is probable cause that the deposits/investments are involved/related to an unlawful activity as defined in Sec. 3(i) of the AMLA or a money laundering offense under Sec. 4 thereof; except that no court order shall be required in cases involving kidnapping for ransom; drug trafficking and related offenses; and hijacking, destructive arson and murder, including those perpetrated by terrorists against non-combatant persons and similar targets.

The Anti-Money Laundering Council (AMLC) Vision To be a world-class financial intelligence unit that will help establish and maintain an internationally compliant and effective anti-money laundering regime which will provide the Filipino people with a sound, dynamic and strong financial system in an environment conducive to the promotion of social justice, political stability and sustainable economic growth. Towards this goal, the AMLC shall, without fear or favor, investigate and cause the prosecution of money laundering offenses. Mission To protect and preserve the integrity and confidentiality of bank accounts To ensure that the Philippines shall not be used as a money laundering site for proceeds of any unlawful activity. To extend cooperation in transnational investigation and prosecution of person involved in money laundering activities wherever committed. Organization The Anti-Money Laundering Council is composed of the Governor of the Bangko Sentral ng Pilipinas (BSP) as Chairman and the Commissioner of the Insurance Commission (IC) and the Chairman of the Securities and Exchange Commission (SEC) as members. It acts unanimously in the discharge of its functions. The AMLC is assisted by a Secretariat headed by an Executive Director and consists of four (4) units; the Compliance and Investigation Group (CIG), the Legal Evaluation Group (LEG), the Information Management and Analysis Group (IMAG) and the Administrative and Financial Services Division (AFSD). Functions Requires and receives covered or suspicious transaction reports from covered institutions (banks and all other institutions and their subsidiaries and affiliates supervised or regulated by BSP; insurance companies and all other institutions supervised or regulated by the IC; and securities dealers and other entities supervised or regulated by the SEC); Issues orders addressed to the appropriate Supervising Authority (the BSP, IC or SEC) or the covered institution to determine the true identity of the owner of any monetary instrument/property subject of a covered or suspicious transaction report or request for assistance from a foreign State, or believed by the AMLC, on the basis of substantial evidence, to be representing, involving, or related to the proceeds of an unlawful activity; Institutes civil forfeiture proceedings and all other remedial proceedings through the Office of the Solicitor General; Causes the filing of complaints with the Department of Justice or the Ombudsman for the prosecution of money laundering offenses; Investigates suspicious transactions and covered transactions deemed suspicious after an investigation by AMLC, money laundering activities, and other violations of the AMLA; Applies before the Court of Appeals, ex parte, for the freezing of any monetary instrument/property alleged to be proceeds of any unlawful activity as defined in the AMLA; Implements such measures as may be necessary and justified to counteract money laundering; Receives and takes action in respect of any request for assistance from foreign states in their own anti-money laundering operations; Develops educational programs on the pernicious effects of money laundering, the methods and techniques used in money laundering, the viable means of preventing money laundering and the effective ways of prosecuting and punishing offenders;

Enlists the assistance of any branch, department, bureau, office, agency or instrumentality of the government, including government-owned and controlled corporations in undertaking any and all anti-money laundering operations, which may include the use of its personnel, facilities and resources for the more resolute prevention, detection and investigation of money laundering offenses and prosecution of offenders; Imposes administrative sanctions for the violation of laws, rules, regulations and orders and resolutions issued pursuant thereto; and Examines or inquires into bank deposits/investments upon order of any competent court in cases of violation of the AMLA, when it has been established that there is probable cause that the deposits/investments are related to an unlawful activity. No court order, however, is necessary in cases involving kidnapping for ransom; narcotics offenses; and hijacking, destructive arson and murder, including those perpetrated by terrorists against non-combatant persons and similar targets. To ensure compliance with AMLA, the BSP may inquire into or examine any deposit or investment with any banking institution or non-bank financial institution when the examination is made in the course of a periodic or special examination in accordance with the rules of examination of the BSP.

References: http://www.mb.com.ph/articles/363660/antimoney-laundering http://www.gov.ph/2012/06/18/republic-act-no-10167/ http://www.amlc.gov.ph/amla.html ___________________________________________________________________

GROUP 11 Debt-Equity Capital and Project Financing

DEBT and EQUITY CAPITAL You need money to run a business! This money is called capital. You can borrow it, you can get contributions from owners of the business, you can get money from outside investors or you can reinvest your businesss earnings back into the business to make it grow.

CAPITAL - assets available for use in the production of further assets. DEBT CAPITAL is the capital that a business raises by taking out a loan. It is a loan made to a company that is normally repaid at some future date. Subscribers to a debt capital do not become part owners of the business, but merely creditors, and the suppliers of debt capital usually receive a contractually fixed annual percentage return on their loan, and this is known as the coupon rate. Debt capital ranks higher than equity capital for the repayment of annual returns. This means that legally, the interest on debt capital must be repaid in full before any dividends are paid to any suppliers of equity. A company that is highly geared has a high debt-to-equity capital ratio. (Wikipedia)

EQUITY CAPITAL invested money that, in contrast to debt capital, is not repaid to the investors in the normal course of business. It represents the risk capital staked by the owners through purchase of a companys common stock (ordinary shares). (Wikipedia) In short, it is the capital raised from owners in the company. The value of equity capital is computed by estimating the current market value of everything owned by the company from which the total of all liabilities is subtracted on the balance sheet of the company, equity capital is listed as stockholders equity or owners equity. Also called equity financing or share capital. (Wikipedia) Owners can choose to sell equity in the company, in the form of stock, to investors. This is usually done through a direct offering to the public or through an underwriter like an investment banks. Equity capital is used to get companies off the ground. (Business finance)

Definition of 'Debt/Equity Ratio' A measure of a company's financial leverage calculated by dividing its total liabilities by stockholders' equity. It indicates what proportion of equity and debt the company is using to finance its assets.

Note: Sometimes only interest-bearing, long-term debt is used instead of total liabilities in the calculation. Also known as the Personal Debt/Equity Ratio, this ratio can be applied to personal financial statements as well as corporate ones. (Investopedia)

A high debt/equity ratio generally means that a company has been aggressive in financing its growth with debt. This can result in volatile earnings as a result of the additional

interest

expense.

If a lot of debt is used to finance increased operations (high debt to equity), the company could potentially generate more earnings than it would have without this outside financing. If this were to increase earnings by a greater amount than the debt cost (interest), then the shareholders benefit as more earnings are being spread among the same amount of shareholders. However, the cost of this debt financing may outweigh the return that the company generates on the debt through investment and business activities and become too much for the company to handle. This can lead to bankruptcy, which would leave shareholders with nothing. The debt/equity ratio also depends on the industry in which the company operates. For example, capital-intensive industries such as auto manufacturing tend to have a debt/equity ratio above 2, while personal computer companies have a debt/equity of under 0.5. Debt-to-equity ratio. A company's debt-to-equity ratio indicates the extent to which the company is leveraged, or financed by credit. A higher ratio is a sign of greater leverage. You find a company's debt-to-equity ratio by dividing its total long-term debt by its total assets minus its total debt. You can find these figures in the company's income statement, which is provided in its annual report. Average ratios vary significantly from one industry to another, so what is high for one company may be normal for another company in a different industry. >From an investor's perspective, the higher the ratio, the greater the risk you take in investing in the company. But your potential return may be greater as well if the company uses the debt to expand its sales and earnings. Debt and Equity Capital distinguish Theres a key difference between equity capital and debt. Debt is something that you borrow and pay interest on. You have to repay it eventually. Equity capital is an ownership interest that is valued by the market price of a piece of property minus the debts against that property. Some securities may be somewhat of a combination of both. Debt claims are also known as fixed claims and equity claims are also known as residual claims. (Hamilton) Debt A debt is an obligation owed by one party (the debtor) to a second party, the creditor; usually this refers to assets granted by the creditor to the debtor, but the term can also be used metaphorically to cover moral obligations and other interactions not based on economic value. A debt is created when a creditor agrees to lend a sum of assets to a debtor. Debt is usually granted with expected repayment; in modern society, in most cases, this includes repayment of the original sum, plus interest.[1] In finance, debt is a means of using anticipated future purchasing power in the present before it has actually been earned. Some companies and corporations use debt as a part of their overall corporate finance strategy. Types of Debt: 1. Secured Debt - creditors have recourse to the assets of the company on a proprietary basis or otherwise ahead of general claims against the company;

2. 3. 4. 5.

Unsecured Debt - where creditors do not have recourse to the assets of the borrower to satisfy their claims; Private Debt comprises bank-loan type obligations, whether senior or mezzanine; Public Debt - covering all financial instruments that are freely tradeable on a public exchange or over the counter, with few if any restrictions; Syndicated Debt provided by a group of lenders and is structured, arranged, and administered by one or several commercial banks or investment banks known as arrangers. Bilateral Debt.

6.

Effects of Debts: Debt allows people and organizations to do things that they would otherwise not be able, or allowed, to do. Commonly, people in industrialized nations use it to purchase houses, cars and many other things too expensive to buy with cash on hand. Likewise, companies use debt in many ways to leverage the investment made in their assets, "leveraging" the return on their equity. This leverage, the proportion of debt to equity, is considered important in determining the riskiness of an investment; the more debt per equity, the riskier. For both companies and individuals, this increased risk can lead to poor results, as the cost of servicing the debt can grow beyond the ability to pay due to either external events (income loss) or internal difficulties (poor management of resources). Equity Capital: Capital includes money, land, equipment, buildings, and anything else that has intrinsic value that can be converted to cash or used as collateral for loans. When something is fully paid, it is said to be capitalized because it becomes an asset rather than a liability. It becomes a capital asset. Equity on the other hand is ownership expressed as the total value of the asset minus any liability against that asset, such as money borrowed to buy it or liens against the asset's value. When capital is added, equity increases. Equity capital is capital raised from owners in the company. This is different from debt capital which is money raised by incurring debt through the issuance of debentures and other types of bonds. Owners can choose to sell equity in the company, in the form of stock, to investors. This is usually done through a direct offering to the public or through an underwriter like an investment bank. Equity capital is used to get companies off the ground Entrepreneurs start their companies by attracting investors who contribute their capital for an ownership share. This ownership share is called equity, and the contribution is called equity capital. Management of the company uses that capital to purchase plants and equipment. Stockholders use their capital to purchase stock in the company, and they each own a share or percentage of the company by virtue of their investment of capital. Companies also borrow money and carry other liabilities in the form of accounts payable. The total value of the company minus the total amount of liabilities is what is called stockholder's equity, which refers to the actual amount of equity the stockholders have in the company. Illustration:

When you buy a house, you make a down payment of capital in order to purchase that house. Your down payment doesn't cover the total cost of the house, so you borrow the rest of the money from the bank. Your down payment of capital is your equity in the house, and the bank owns the rest. Over years of mortgage payments, you gradually increase the percentage of your ownership until you pay off the loan and own 100 percent interest in your house. You have increased your equity by using your earned capital to pay the bank. Debt vs. Equity Capital: Debt and equity are the two main sources of capital available to businesses, and each offers both advantages and disadvantages. Debt financing takes the form of loans that must be repaid over time, usually with interest. Businesses can borrow money over the short term (less than one year) or long term (more than one year). Equity financing takes the form of money obtained from investors in exchange for an ownership share in the business. Such funds may come from friends and family members of the business owner, wealthy "angel" investors, or venture capital firms. Debt Financing Advantages:

Debt Financing Advantages:

You can use your cash and that of your investors when you start up your business for all the start-up costs, instead of making large loan payments to banks or other organizations or individuals. You can get underway without the burden of debt on your back. If you have prepared a prospectus for your investors and explained to them that their money is at risk in your brand new start-up business, they will understand that if your business fails, they will not get their money back. Depending on who your investors are, they may offer valuable business assistance that you may not have. This can be important, especially in the early days of a new firm. You may want to consider angel investors or venture capital funding. Choose your investors wisely.

Debt financing allows you to have control of your own destiny regarding your business. You do not have investors or partners to answer to and you can make all the decisions. You own all the profit you make. If you finance your business using debt, the interest you repay on your loan is tax-deductible. This means that it shields part of your business income from taxes and lowers your tax liability every year. Your interest is usually based on the prime interest rate. The lender(s) from whom you borrow money do not share in your profits. All you have to do is make your loan payments in a timely manner. You can apply for a Small Business Administration loan that has more favorable terms for small businesses than traditional commercial bank loans.

Disadvantages:

Disadvantage:

Remember that your investors will actually own a piece of your business; how large that piece is depends on how much money they invest. You

The disadvantages of borrowing money for a small business may be great. You may have large loan payments at

probably will not want to give up control of your business, so you have to be aware of that when you agree to take on investors. Investors do expect a share of the profits where, if you obtain debt financing, banks or individuals only expect their loans repaid. If you do not make a profit during the first years of your business, then investors don't expect to be paid and you don't have the monkey on your back of paying back loans.

precisely the time you need funds for start-up costs. If you don't make loan payments on time to credit cards or commercial banks, you can ruin your credit rating and make borrowing in the future difficult or impossible. If you don't make your loan payments on time to family and friends, you can strain those relationships.

Since your investors own a piece of your business, you are expected to act in their best interests as well as your own, or you could open yourself up to a lawsuit. In some cases, if you make your firm's securities available to just a few investors, you may not have to get into a lot of paperwork, but if you open yourself up to wide public trading, the paperwork may overwhelm you. You will need to check with the Securities and Exchange Commission to see the requirements before you make decisions on how widely you want to open up your business for investment.

Project Financing Project finance is the long term financing of infrastructure and industrial projects based upon the projected cash flows of the project rather than the balance sheets of the project sponsors. Usually, a project financing structure involves a number of equity investors, known as sponsors, as well as a syndicate of banks or other lending institutions that provide loans to the operation. The loans are most commonly non-recourse loans, which are secured by the project assets and paid entirely from project cash flow, rather than from the general assets or creditworthiness of the project sponsors, a decision in part supported by financial modeling. The financing is typically secured by all of the project assets, including the revenue-producing contracts. Project lenders are given a lien on all of these assets, and are able to assume control of a project if the project company has difficulties complying with the loan terms. Generally, a special purpose entity is created for each project, thereby shielding other assets owned by a project sponsor from the detrimental effects of a project failure. As a special purpose entity, the project company has no assets other than the project. Capital contribution commitments by the owners of the project company are sometimes necessary to ensure that the project is financially sound, or to assure the lenders of the sponsors' commitment. Project finance is often more complicated than alternative financing methods. Traditionally, project financing has been most commonly used in the extractive (mining), transportation, telecommunications and energy industries.

Main Parties to Project Financing

Lenders
(nonrecourse

70%

30%

Sponsors
(equity holders, typically have a controlling stake in the Project Company)

Suppliers

Project Compan y
Host Government

Contractors

Customers

Characteristics of Project Finance A project is established as a separate company A major proportion of the equity of the project company is provided by the project manager or sponsor, thereby tying the provision of finance to the management of the project The project company enters into comprehensive contractual arrangements with suppliers and customers The project company operates with a high ratio of debt to equity, with lenders having only limited recourse to the equity-holders in the event of default

Nature: The financing of long-term infrastructure, industrial projects and public services. project financing is a loan structure. attractive to the private sector.

Comparison of Project Finance to Traditional Lending In traditional lending: Projects are generally not incorporated as separate companies Contractual arrangements are not as comprehensive Debt to equity ratios are not as high Loans offer lenders recourse to the assets of borrowers in case of default

Project Finance Benefits (Ownership Structure) To allow joint ventures without requiring the exhaustive mutual evaluation of the creditworthiness of potential partners To limit the liability of project sponsors To limit the exposure of creditors to well-defined project risks To distribute project risks efficiently

ADVANTAGES Project financing is usually chosen by project developers in order to incorporate themselves Eliminate or reduce the lenders recourse to the sponsors Permit an off-balance sheet treatment of the debt financing Maximize the leverage of a project Circumvent any restrictions or covenants binding the sponsors under their respective financial obligations Avoid any negative impact of a project on the credit standing of the sponsors Obtain better financial conditions when the credit risk of the project is better than the credit standing of the sponsors Reduce political risks affecting a project

DISADVANTAGES Often takes longer to structure than equivalent size corporate finance. Higher transaction costs due to creation of an independent entity Project debt is substantially more expensive (50-400 basis points) due to its non-recourse nature. Extensive contracting restricts managerial decision making. Project finance requires greater disclosure of proprietary information and strategic deals.

PF versus CF Project Finance Purpose: a single purpose capital asset. The project company is dissolved once the project is completed. No growth opportunities. A legally independent project: The project company does not have access to the internally-generated cash flows of the sponsoring firm and vice versa. The investment is financed with non-recourse debt. All the interest and loan repayments come from the cash flows generated from the project.

Corporate Finance A company invests in many projects simultaneously. The investment is financed as part of the companys existing balance sheet. The lenders can rely on the cash flows and assets of the sponsor company apart from the project itself. Lenders have a larger pool of cash flows from which to get paid. Cash flows and assets are cross-collateralized.

Bibliography Investopedia. Retrieved 16 May 2012. Joseph Swanson and Peter Marshall, Houlihan Lokey and Lyndon Norley, Kirkland & Ellis International LLP (2008). A Practitioner's Guide to Corporate Restructuring page 5. City & Financial Publishing, 1st edition ISBN 978-1-905121-31-1 Jefferson, Steve. "When Raising Funds, Start-Ups Face the Debt vs. Equity Question." Pacific Business News, 3 August 2001. Tsuruoka, Doug. "When Financing a Small Business, Compare Options, Keep It Simple." Investor's Business Daily, 3 May 2004. WomanOwned.com. "Growing Your Business: Debt Financing vs. Equity Financing." Workshop on Project Finance by Sergio Pernice, PhD. GROUP 12 CAPITAL MARKET DEVELOPMENT What is a Capital Market?

A capital market provides for the buying and selling of long term debt or equity backed securities. It involves long term transactions (i.e. loans payable in more than 1 year; bonds, debentures, shares)6

What is Market Development?

It is the shared responsibility and commitment between the market and regulators to attain consumer satisfaction and consumer protection.

Why the need to develop?

To keep our domestic financial market stable. This is only possible if financial institutions are adequately capitalized and competently managed, and that the investing and depositing public has full faith and confidence in the system.

Wikipedia

How is it developed?

1. By ensuring that financial institutions are adequately capitalized and competently managed 2. By ensuring that the investing and depositing public has full faith and confidence in the system What are the elements of Capital Development?

Stable macroeconomic conditions Good corporate governance Sound legal, accounting infrastructure Limited tax distortions Efficient market operating infrastructure Conducive and effective supervision & regulation Skills & professional development

Who assists the Government in its development?

Capital Market Development Council (CMDC)

What is CMDC?

It is a public-private sector partnership focused on recommending policy and legislative reforms toward the development of the Philippine capital market.

What is the composition of the CMDC?

1. 2. 3. 4. 5. 6. 7. 8. 9.

Department of Finance (DOF) Bangko Sentral ng Pilipinas (BSP) Securities and Exchange Commission (SEC) Bankers Association of the Philippines (BAP) Financial Executives Institute of the Philippines (FINEX) Investment House Association of the Philippines (IHAP) Philippine Stock Exchange (PSE) Insurance Commission (IC) Philippine Life Insurance Association (PLIA)

10.Philippine Insurers & Reinsurers Association (PIRA) 11.Philippine Federation of Pre-Need Plan Co. Inc. (PRE-NEED) 12.Philippine Dealing System Holdings Corporation (PDS) 13.Philippine Association of Securities Brokers and Dealers Inc. (PASBDI) 7 Why is the CMDC composed in this way?

To ensure that the four pillars of the financial system are represented.

What are the four pillars?

1. Banks primary responsibility for the payments system and the clearing of cheques and focused more on commercial lending. They served as an intermediary between savers and borrowers with respect to savings accounts and shorter-term deposits. 2. TrustCompanies - manage trust funds and invest them, accept term deposits, and make funds available to borrowers more for mortgages than for commercial loans 3. InsuranceCompanies -receive funds for the purposes of insurance protection and invested these funds in various assets 4. InvestmentDealers -serve to bring lenders and borrowers together to facilitate transactions in equities (stocks) or bonds. What are the objectives of CDMC?

1. MARKET: Attaining competitive parity Submarkets complement but compete with each other

Eg. Banks vs Non-banks

2. DIVERSITY: Expanding financial choices available to the consumer Savers value liquidity but term funds are also necessary
7

CDMC Primer

E.g.

Housing needs Education for the kids Retirement planning Insurance

3. EFFICIENCY: Improving the delivery of financial products and services E.g.

Establishment of a Financial Sector Forum (FSF) among the BSP, SEC, Insurance Commission, & PDIC to achieve a more level regulatory playing field.

4. Investor Protection: Providing protection to the investor E.g.

Participation in legal reforms by making recommendations to the legislators in the preparation of fiscal policies

What are the laws or legislation referred to?

1. Personal Equity and Retirement Account (R.A. 9505) Promotes capital market development and savings mobilization by establishing a legal and regulatory framework for retirement plans comprised of voluntary personal savings and investments.

2. Credit Information System Act (R.A. 9510) Provides for the creation of a Corporation primarily intended to be a central registry or repository of credit information and shall provide access to reliable, standardized information on credit history and financial condition of borrowers, whether individuals

or corporations, in support of, and essential to, the development of the Philippine financial market

3. Real Estate Investment Trust Act of 2009 (R.A. 9856) Promotes the development of the capital market, democratize wealth by broadening the participation of Filipinos in the ownership of real estate in the Philippines, use the capital market as an instrument to help finance and develop infrastructure projects, and protect the investing public by providing an enabling regulatory framework and environment under which real estate investment trusts, through certain incentives granted herein, may assist in achieving the objectives of this policy.

4. Financial Rehabilitation and Insolvency Act (R.A. 10142) Encourages debtors, both juridical and natural persons, and their creditors to collectively and realistically resolve and adjust competing claims and property rights. In furtherance thereof, the State shall ensure a timely, fair, transparent, effective and efficient rehabilitation or liquidation of debtors. The rehabilitation or liquidation shall be made with a view to ensure or maintain certainly and predictability in commercial affairs, preserve and maximize the value of the assets of these debtors, recognize creditor rights and respect priority of claims, and ensure equitable treatment of creditors who are similarly situated. When rehabilitation is not feasible, it is in the interest of the State to facilities a speedy and orderly liquidation of these debtor's assets and the settlement of their obligations.

What are the benefits of Capital Market Development?

Channels funds to most appropriate investments; Sets benchmark for risk-free yield curve; Provides access to local currency funding; Provides diversified and higher returns for domestic savings; Reprices financial assets continuously; Helps develop new hedging instruments; Attracts different types of investors; Ensures better financial reporting in both financial and real sectors of the economy

GROUP 13- PROJECT FINANCE I. Definition

Project Finance is a financing of a major independent capital investment that the sponsoring company has segregated from its assets and general purpose obligations. [Larry Wynant. Essential elements of project financing, Harvard Business Review. May-June 1980, p.166, as cited by Bruce Comer inProject Finance Teaching Note for the Wharton School]

Project Finance is the use of nonrecourse or limited-recourse financing.

Nonrecourse Financing: lenders are repaid only from the cash flow generated by the project or, in the event of complete failure, from the value of the projects assets.

Limited Recourse Financing: lenders may also have limited recourse to the assets of aparent company sponsoring a project. [World Bank. 1994. World Development Report 1994. New York: Oxford University Press, p. 94. as cited by Bruce Comer inProject Finance Teaching Note for the Wharton School]

II. Characteristic of the Transaction

Capital-intensive Project financings tend to be large-scale projects that require a great deal of debt and equity capital, from hundreds of millions to billions of dollars. Infrastructure projects tend to fill this category.

Highly leveraged These transactions tend to be highly leveraged with debt accounting for usually 65% to 80% of capital in relatively normal cases.

Long Term The tenor for project financings can easily reach 15 to 20 years.

Independent entity with a finite life For example, in a build-operate-transfer (BOT) project, the project company ceases to exist after the project assets are transferred to the local company.

Non-recourse or limited recourse financing Lenders place asubstantial degree of reliance on the performance of the project itself. As a result, they will concern themselves closely with the feasibility of the project and its sensitivity to the impact of potentially adverse factors. Lenders must work with engineers todetermine the technical and economic feasibility of the project.

Controlled dividend policy To support a borrower without a credit history in a highly-leveraged project with significant debt service obligations, lenders demand receiving cash flows from the project as they are generated.

Many participants It is not rare to find over ten parties playing major roles in implementing the project.

Allocated risk Because many risks are present in such transactions, often the crucial element required to make the project go forward is the proper allocation of risk. This allocation is achieved and codified in the contractual arrangements between the project company and the other participants.

Costly The greater need for information, monitoring and contractual agreements increases the transaction costs. The highly-specific nature of the financial structures also entails higher costs and can reduce the liquidity of the projects debt. Margins for project financings also often include premiums for country and political risks since so many of the projects are in relatively high risk countries.

III. Comparison with Corporate Finance

Dimension Financing vehicle Type of capital

Corporate Finance Multi-purpose organization Permanent - an indefinite time

Project Finance Single-purpose entity Finite - time horizon matches life of

horizon for equity Dividend policy and reinvestment decisions Corporate management makes decisions autonomous from investors and creditors Opaque to creditors

project Fixed dividend policy - immediate payout; no reinvestment allowed

Capital investment decisions Financial structures

Highly transparent to creditors

Easily duplicated; common forms

Highly-tailored structures which cannot generally be re-used Relatively higher costs due to documentation and longer gestation period Might require critical mass to cover high transaction costs Technical and economic feasibility; focus on projects assets, cash flow and contractual arrangements Relatively higher

Transaction costs for financing

Low costs due to competition from providers, routinized mechanisms and short turnaround time Flexible

Size of financings

Basis for credit evaluation

Overall financial health of corporate entity; focus on balance sheet and cashflow Relatively lower

Cost of capital Investor/ lender base

Typically broader participation; deep Typically smaller group; limited secondary markets secondary markets

IV. Advantages

It can raise larger amounts of long-term, foreign equity and debt capital for a project. It protects the project sponsors balance sheet. Through properly allocating risk, it allows a sponsor to undertake a project with more risk than the sponsor is willing to underwrite independently. It applies strong discipline to the contracting process and operations through proper risk allocation and private sector participation. The process also applies tough scrutiny on capital investment decisions. By involving numerous international players including the multilateral institutions, it can provide a kind of de facto political insurance. V. Disadvantages

It is a complex financing mechanism that can require significant lead times. High transaction costs are involved in developing these one-of-a-kind, specialpurpose vehicles. The projects have high cash flow requirements and elevated coverage ratios. The contractual arrangements often prescribe intrusive supervision of the management and operations that would be resented in a corporate finance environment. VI. Key Players

PROJECT ANGEL MODEL By Thomas H. Pyle, Managing Director of Princeton Pacific Group and a project finance lecturer with Euromoney Insitute of Finance as cited by Bruce Comer inProject Finance Teaching Note for the Wharton School

Bank

GOVERNMENT Role is often most influential. Approval of the project, Control of the state company that sponsors the project, responsibility for operating and environmental licenses, tax holidays, supply guarantees, and industry

regulations or policies, providing operating concessions, Maintenance of an environment conducive to the project PROJECT SPONSOR/ OWNER May be a single company or for a consortium, Typical sponsors include foreign multinationals, local companies,contractors, operators, suppliers or other participants Provide equity financing or subordinated loans to the project May be required to put up additional funds in case of cost overruns PROJECT COMPANY Single-purpose entity created solely for the purpose of executing the project. Controlled by project sponsors, it is the center of the project Only source of income for the project company is the tariff or throughput charge from the project Often the project company is the project sponsors financing vehicle for the project, i.e., it is the borrower for the project. CONTRACTOR Responsible for constructing the project to the technical specifications outlined in the contract with the project company Primary contractors will then sub-contract with local firms for components of the construction. OPERATOR Responsible for maintaining the quality of the projects assets and operating the power plant, pipeline, etc. at maximum efficiency. Might be a multinational, a local company or a joint-venture. SUPPLIER Provides the critical input to the project. i.e., a power plant, the supplier would be the fuel supplier. But the supplier does not necessarily have to supply a tangible commodity, i.e., inmine, the supplier might be the government through a mining concession; toll roads or pipeline, the critical input is the right-of-way for construction which is granted by the government. CUSTOMER Party who is willing to purchase the projects output, whether the output be a product (electrical power, extracted minerals, etc.) or a service (electrical power transmission or pipeline distribution). The goal for the project company is to engage customers who are willing to sign long-

term, offtake agreements COMMERCIAL BANKS Primary source of funds for project financings. In arranging these large loans, the banks often form syndicates to sell-down their interests for de facto political insurance. A project might be better served by having commercial banks finance the construction phase because banks have expertise in loan monitoring on a month-tomonth basis, and because the bank group has the flexibility to renegotiate the construction loan VII. Additional Players

CAPITAL MARKET Major investment banks have recently completed a number of capital market issues for international infrastructure projects. The capital market route can be cheaper and quicker than arranging a bank loan. The credit agreement is often less restrictive than that in a bank loan. Might be for longer periods than commercial bank lending DISADVANTAGES: The necessity of preparing a more extensive disclosure document; Capital market investors are less likely to assume construction risk; The bond trustee plays a greater role; more disparate investors - not a club of banks; Unlike bank debt, proceeds are disbursed in a single lump sum, leading to negative carrying costs DIRECT EQUITY INVESTMENT FUNDS Represent another source of equity capital for project financings. These funds raise capital from a limited number of large institutional investors. Then their advisory teams screen a large number of infrastructure projects for potential investment opportunities. The funds typically take minority stakes of the infrastructure projects in which they invest.

MULTILATERAL AGENCIES World Bank, International Finance Corporation and regional development banks often act as lenders or co-financers to important infrastructure projects in developing countries. Play a facilitating role for projects by implementing programs to improve the regulatory frameworks for broader participation by foreign companies and the local private sector Participation give further assurance to lenders that the local government and state companies will not interfere detrimentally with the project.

EXPORT CREDIT AGENCY For infrastructure projects in developing countries requiring imported equipment from the developed countries Provide a loan guarantee or funding to projects for an amount that does not exceed the value of exports that the project will generate for the ECAs home country

INSURER National agencies, private insurers and multilateral institutions, offer political risk and other insurance to project sponsors.

LEGAL ADVISERS Play a role in assembling project finance transactions given the number of important contracts and the need for multi-party negotiations. Play a role in interpreting the regulatory frameworks in the local countries.

FINANCIAL ADVISERS The project sponsors might work with a financial adviser, e.g., commercial bank, investment bank or independent consultant, to structure the financing for the project

TRUSTEE Responsible for monitoring the projects progress and adherence to schedules and specifications, Usually working with the independent engineer to coordinate fund disbursements against a projects actual achievement.

VIII. Risks and Mitigants

Risk Country risks

Example - Civil unrest, - Guerrilla sabotage of projects, - Work stoppages, - Any other form of force majeure, - Exchange controls, - Monetary policy, - Inflationary conditions, etc.

Mitigants - Political risk insurance against force majeure events or - Allocating risk to the local company. - Involving participants from a broad coalition of countries also gives the project sponsors leverage with the local

government. Political risks - Change of administration - Changes in national policies, - Laws regulatory Frameworks. - Environmental laws, energy policies and tax policies - Price regulation, - Restrictions on working permits for foreign managers, - Renegotiation of contracts, - Buyouts - Political risk insurance - Flexible tariff agreements that incorporate adjustments for these types of contingencies. - An intimate acquaintance with the local political environment also increases a project sponsors ability to foresee trouble spots

Industry risks

- Competitive forces within the - Industry analysis and industry - Insight into the industrys - The influence of other existing underlying dynamics or planned pipelines in the area; - Cost of transportation, the economics of the pipeline to the end users - Substitutes - other sources of energy that could compete with the fuel being transported;

Project risks

- Adequacy and track-record of the concerned technology and the experience of the projects management

- The selection of contractors, developers and operators who have proven track records. Independent consulting engineers can play a role in assessing the technical feasibility of projects by making technical risks transparent to lenders.

Customer risks

- Demand for the product or - Essentially, a project company throughput agrees to declines or widely fluctuates. sell a large share of its output (minerals, electricity, transportation services through a pipeline, etc.) to a customer or group of customers for an extended period of time. - Securing supplies for the - Long-term agreements that

Supplier risks

project - electricity, water, etc.

guarantee that the project will have access to critical inputs for the duration of the projects life - Investors and lenders can mitigate these risks by carefully evaluating the project sponsors track record with similar transactions - Scrutinizing the contractor, specifically the contractors experience with similar projects, reputation in the field, backlog of other projects and cash flow. - It is also important to review the contractors bidding history.

Sponsor risks

Sponsors experience, management ability, its connections both international and with the local agencies, and the sponsors ability to contribute equity. - Schedule delays and budget overruns.

Contractor risks

Operating risks

- Efficient, continuous operation - Contracted incentive schemes of the project, whether it is a mining operation, toll road, power plant or pipeline. Product liability, design - Using older, tested designs problems, etc. and technologies reduces the - The underlying risk here is risk of unforeseen liabilities. unperceived risks with the product, e.g., unforeseen environmental damages.. - Related to industry risk, however it focused more directly on resources with which the competitor might be able to circumvent competitive barriers. - The capital necessary for the project is not available. - Equity participants might fail to contribute their determined amount. - Underwriters might not be able to raise the target amount in the market. Division between - Exclusive agreements, offtake agreements and supply arrangements all contribute to defending a long-term competitive advantage.. - The choice of an experienced financial advisor as well as seeking capital from a broad range of sources - To restructure transactions to delay drawdown dates or to change the amounts of foreign versus local

Product risks

Competitor risks

Funding risks

local and funding. Currency risks

foreign

currency currency.

- Exchange rate - Currency controls

fluctuation - Engage in a currency swap

Interest rate risks

- Interest rate fluctuations

- Arranging for long-term financing at fixed rates mitigates the risk inherent in floating rates. - Projects can enter into interest rate swaps to hedge against interest rate fluctuations - Proper allocation of risk/ minimizing and apportioning the risk among the various participants, such as the sponsors, contractors, buyers and lenders

Risk allocation risks

-If the wrong parties are responsible for risks they are not suited to manage, the entire structure is at risk.

IX. Project Finance Models

Illustrates a long-term agreement with fixed or minimum prices The buyer guarantees a certain cash flow to the project that allows the latter to service in debts.

Requires another party to cover the shortfall in revenues to ensure that the project can service its debts

Involves a trust account to ensure that the creditor is repaid The trustee receives payments from customers and payment for debt service directly Only the excess is remitted to the project

Involves segregating or assigning part of the project's output to a creditor The creditor then sells the output and uses the proceeds to service the debt The lender is exposed to market risk if the denmand for the output is weak

X. Case Study: Hopewell Pagbilao Project

$993M, 700 MW Coal Fired Thermal Powerplant in Pagbilao, Quezon BOT project between Hopewell Energy International Ltd. and NPC for 25 years. With participation of ADB, International Finance Corp and Commonwealth Development Corp. Export Credit Financing by Export-Import Bank of Japan Hopwell shall responsible for the design, construction, completion and testing of the powerplant NPC commits to buy all electricity genrated on a take-or-pay basis, supply the plant with fuel and electricity, pay land acquisition and taxes, pay charges, toll fees, to Hopewell DOF issued a performance undertaking to assure that NPC will perform Risks identified: Delay by NPC in putting wires on 21 transmission facilites. Hopewell charged penalty, in alternative NPC extended the contract period from 25 to 28 years (Construction Risk) NPC claims that defects in plant's jetty and berthing were the reasons for the delay in the delivery of coal (Operation Risk) Residents of Barangay Capalos complained of pollution and fish kill. 230 families await resettlement. (Political Risk) Apparently, these are not enough to dampen the enthusiasm of Hopewell since it is building a bigger 1000 MW coal- fired facility in Sual Pangasinan

XI. References Philippine Project Finance Vol II, Ybanez et al., 1998 Project Finance Teaching: Notes for the Wharton School, Bruce Comer, 1996

GROUP 14 PORTFOLIO MANAGEMENT Importance /Need for Portfolio Management Portfolio management presents the best investment plan to the individuals as per their income, budget, age and ability to undertake risks. Portfolio management minimizes the risks involved in investing and also increases the chance of making profits. Portfolio managers understand the clients financial needs and suggest the best and unique investment policy for them with minimum risks involved. Portfolio management enables the portfolio managers to provide customized investment solutions to clients as per their needs and requirements. Types of Portfolio Management Portfolio Management is further of the following types: Active Portfolio Management: As the name suggests, in an active portfolio management service, the portfolio managers are actively involved in buying and selling of securities to ensure maximum profits to individuals. Passive Portfolio Management: In a passive portfolio management, the portfolio manager deals with a fixed portfolio designed to match the current market scenario. Discretionary Portfolio management services: In Discretionary portfolio management services, an individual authorizes a portfolio manager to take care of his financial needs on his behalf. The individual issues money to the portfolio manager who in turn takes care of all his investment needs, paper work, documentation, filing and so on. In discretionary portfolio management, the portfolio manager has full rights to take decisions on his clients behalf. Non-Discretionary Portfolio management services: In non discretionary portfolio management services, the portfolio manager can merely advise the client what is good and bad for him but the client reserves full right to take his own decisions.

Advisory Under these services, the portfolio manager only suggests the investment ideas. The choice as well as the execution of the investment decisions rest solely with the Investor.

THE PORTFOLIO CONSTRUCTION PROCESS STEP 1: DETERMINATION OF INVESTORS GOALS Professional Personal projects Cultural Social Religious

STEP 2: IDENTIFICATION OF THE INVESTORS CURRENT STAGE OF LIFE AND ITS INVESTMENT TIME HORIZON STAGES: a. Accumulation- includes asset accumulation and its ability to generate income b. Consolidation- when income exceeds spending c. Spending- use of income and possible consumption of capital d. Inheritance transfer STEP 3: CHOOSING A REFERENCE CURRENCY Residence Expenditure Income

STEP 4: EVALUATING THE RISK PROFILE 3 ASPECTS: a. Investors ability to take risks e.g. defining his or her financial limits according to his various commitments, available assets and liquidity needs.

b. Evaluation if the Investor is rick averse to losses or the contrary Player vs. one looking for more certain returns c. Investors consciousness of the risks He must be conscious before taking the risks when making its investment decisions.

STEP 5: ESTIMATING A RETURN TARGET 2 ASPECTS: a. INDIVIDUAL BENCHMARK b. MANAGEMENT OF THE RISKS CHARACTERISTICS OF RETURN TARGET: Target must be an amount of money There must be an expected rate of return The target must be realistic The desired return must correspond to both the available capital and the investors risk profile The desired return must be POSITIVE, meaning it must be higher than the average inflation rate in order to preserve the investors real wealth over time.

STEP 6: DEFINING THE INVESTORS TAX RATE MUST BE TAKEN INTO ACCOUNT: Rate of income Capital gains taxes

STEP 7: DETERMINING THE PROPORTION OF RISKY ASSETS Investors have to decide how much of their capital they are willing to risk and, in the worst-case scenario, lose completely.

STEP 8: EVALUATING THE EXPECTED DEGREE OF LIQUIDITY Investor should define the required speed at which assets can be realised, which will help determine whether less liquid assets can be included in the portfolio.

STEP 9: PORTFOLIO CONSTRUCTION AND MANAGEMENT 3 FRAMEWORKS:

a. STRATEGIC ALLOCATION AND TYPE OF MANAGEMENT Strategic Allocation-defining a targeted distribution of capital between asset classification Type of Management:

i. Passive Management- seeks to replicate the performance of a benchmark index. Index Management is the most common form. This offers enough diversification, good liquidity and helps achieves a performance consistent with the underlying neither more nor less, with low management fees.

ii. Active Management- aims for a better performance than the benchmark index by making specific bets on the stocks that make up the index, and offers greater performance potential. Besides the risk of under-performance and the risk related to the managers decisions, the fees entailed by this type of strategy are higher.

b. TACTICAL ALLOCATION- the various tactical weights must be chosen according to the attractiveness of each asset class, macroeconomic and psychological factors and also the results of fundamental and technical analyses.

c. COMPARISON OF ACTUAL RETURNS WITH TARGET RETURNS The process itself is dynamic. The expected return target should be compared regularly with the actual return resulting from the chosen portfolio construction and the decisions put into effect. GROUP 15 APPLICABLE LAWS Portfolio which is also known as Basket of Stocks refers to any collection of financial assets such as stocks, bonds and cash. Portfolios may be held by individual investors and/or managed by financial professionals, hedge funds, banks and other financial institutions.

Portfolio Management is the professional management of various securities (shares, bonds and other securities) and assets (e.g., real estate) in order to meet specified

investment goals for the benefit of the investors. It also refers to Investment Management, handled by a portfolio manager.

Portfolio Manager refers a person who makes investment decisions using money other people have placed under his or her control or a person who manages a financial institution's asset and liability (loan and deposit) portfolios. It is their job to sift through the relevant information obtained through research and use their judgment to buy and sell securities. Throughout each day, they read reports, talk to company managers and monitor industry and economic trends looking for the right company and time to invest the portfolio's capital.

Applicable Laws (Overview):

Local and foreign investors may invest in the Philippine bond market.

In general, there are no restrictions on foreigners purchasing bonds, moneymarket instruments, or other portfolio investments. Non-residents seeking to invest in the local stock or bond markets are required to finance their transactions through inward foreign exchange remittances or from withdrawals against their foreign currency accounts. They must effect transactions through an authorized security dealer or broker licensed by the Securities Exchange Commission (SEC) or a bona fide member of the Philippine Stock Exchange. Transactions can be carried out either locally or abroad. There are no restrictions on nonresident investors purchasing money market instruments, bonds, or other portfolio investments. A. Constitutional Limitations

1. Art. XII, NATIONAL ECONOMY AND PATRIMONY

a. Section 1. The goals of the national economy are a more equitable distribution of opportunities, income, and wealth; a sustained increase in the amount of goods and services produced by the nation for the benefit of the people; and an expanding productivity as the key to raising the quality of life for all, especially the underprivileged.

The State shall promote industrialization and full employment based on sound agricultural development and agrarian reform, through industries that make full of efficient use of human and natural resources, and which are competitive in both domestic and foreign markets. However, the State shall protect Filipino enterprises against unfair foreign competition and trade practices.

In the pursuit of these goals, all sectors of the economy and all region s of the country shall be given optimum opportunity to develop. Private enterprises, including corporations, cooperatives, and similar collective organizations, shall be encouraged to broaden the base of their ownership.

b. Section 2. All lands of the public domain, waters, minerals, coal, petroleum, and other mineral oils, all forces of potential energy, fisheries, forests or timber, wildlife, flora and fauna, and other natural resources are owned by the State. With the exception of agricultural lands, all other natural resources shall not be alienated. The exploration, development, and utilization of natural resources shall be under the full control and supervision of the State. The State may directly undertake such activities, or it may enter into co-production, joint venture, or production-sharing agreements with Filipino citizens, or corporations or associations at least 60 per centum of whose capital is owned by such citizens. Such agreements may be for a period not exceeding twenty-five years, renewable for not more than twenty-five years, and under such terms and conditions as may provided by law. In cases of water rights for irrigation, water supply, fisheries, or industrial uses other than the development of waterpower, beneficial use may be the measure and limit of the grant.

The State shall protect the nations marine wealth in its archipelagic waters, territorial sea, and exclusive economic zone, and reserve its use and enjoyment exclusively to Filipino citizens.

The Congress may, by law, allow small-scale utilization of natural resources by Filipino citizens, as well as cooperative fish farming, with priority to subsistence fishermen and fish workers in rivers, lakes, bays, and lagoons.

The President may enter into agreements with foreign-owned corporations involving either technical or financial assistance for large-scale exploration, development, and utilization of minerals, petroleum, and other mineral oils according to the general terms and conditions provided by law, based on real contributions to the economic growth and general welfare of the country. In such

agreements, the State shall promote the development and use of local scientific and technical resources.

c. Section 10. The Congress shall, upon recommendation of the economic and planning agency, when the national interest dictates, reserve to citizens of the Philippines or to corporations or associations at least sixty per centum of whose capital is owned by such citizens, or such higher percentage as Congress may prescribe, certain areas of investments. The Congress shall enact measures that will encourage the formation and operation of enterprises whose capital is wholly owned by Filipinos.

In the grant of rights, privileges, and concessions covering the national economy and patrimony, the State shall give preference to qualified Filipinos. The State shall regulate and exercise authority over foreign investments within its national jurisdiction and in accordance with its national goals and priorities.

d. Section 11. No franchise, certificate, or any other form of authorization for the operation of a public utility shall be granted except to citizens of the Philippines or to corporations or associations organized under the laws of the Philippines, at least sixty per centum of whose capital is owned by such citizens; nor shall such franchise, certificate, or authorization be exclusive in character or for a longer period than fifty years. Neither shall any such franchise or right be granted except under the condition that it shall be subject to amendment, alteration, or repeal by the Congress when the common good so requires. The State shall encourage equity participation in public utilities by the general public. The participation of foreign investors in the governing body of any public utility enterprise shall be limited to their proportionate share in its capital, and all the executive and managing officers of such corporation or association must be citizens of the Philippines.

2. Art. XVI, GENERAL PROVISIONS a. Section 11. The ownership and management of mass media shall be limited to citizens of the Philippines, or to corporations, cooperatives or associations, wholly-owned and managed by such citizens. The Congress shall regulate or prohibit monopolies in commercial mass media when the public interest so requires. No combinations in restraint of trade or unfair competition therein shall be allowed.

The advertising industry is impressed with public interest, and shall be regulated by law for the protection of consumers and the promotion of the general welfare. Only Filipino citizens or corporations or associations at least seventy per centum of the capital of which is owned by such citizens shall be allowed to engage in the advertising industry. The participation of foreign investors in the governing body of entities in such industry shall be limited to their proportionate share in the capital thereof, and all the executive and managing officers of such entities must be citizens of the Philippines. B. RA 7042, Foreign Investments Act 1. Section 2. Declaration of Policy. - It is the policy of the State to attract, promote and welcome productive investments from foreign individuals, partnerships, corporations, and governments, including their political subdivisions, in activities which significantly contribute to national industrialization and socioeconomic development to the extent that foreign investment is allowed in such activity by the Constitution and relevant laws. Foreign investments shall be encouraged in enterprises that significantly expand livelihood and employment opportunities for Filipinos; enhance economic value of farm products; promote the welfare of Filipino consumers; expand the scope, quality and volume of exports and their access to foreign markets; and/or transfer relevant technologies in agriculture, industry and support services. Foreign investments shall be welcome as a supplement to Filipino capital and technology in those enterprises serving mainly the domestic market.

As a general rule, there are no restrictions on extent of foreign ownership of export enterprises. In domestic market enterprises, foreigners can invest as much as one hundred percent (100%) equity except in areas included in the negative list. Foreign owned firms catering mainly to the domestic market shall be encouraged to undertake measures that will gradually increase Filipino participation in their businesses by taking in Filipino partners, electing Filipinos to the board of directors, implementing transfer of technology to Filipinos, generating more employment for the economy and enhancing skills of Filipino workers.

2. Section 6. Foreign Investments in Export Enterprises. - Foreign investment in export enterprises whose products and services do not fall within Lists A and B of the Foreign Investment Negative List provided under Section 8 hereof is allowed up to one hundred percent (100%) ownership. Export enterprises which are non-Philippine nationals shall register with BOI (Board of Investments) and submit the reports that may be required to ensure continuing compliance of the export enterprise with its export requirement. BOI shall advise SEC or BTRCP, as the case may be, of any export enterprise that

fails to meet the export ratio requirement. The SEC or BTRCP shall thereupon order the non-complying export enterprise to reduce its sales to the domestic market to not more than forty percent (40%) of its total production; failure to comply with such SEC or BTRCP order, without justifiable reason, shall subject the enterprise to cancellation of SEC or BTRCP registration, and/or the penalties provided in Section 14 hereof. 3. Section 7. Foreign Investments in Domestic Market Enterprises. - NonPhilippine nationals may own up to one hundred percent (100%) of domestic market enterprises unless foreign ownership therein is prohibited or limited by existing law or the Foreign Investment Negative List under Section 8 hereof.

A domestic market enterprise may change its status to export enterprise if over a three (3) year period it consistently exports in each year thereof sixty per cent (60%) or more of its output. 4.Section 8. List of Investment Areas Reserved to Philippine Nationals (Foreign Investment Negative List). - The Foreign Investment Negative List shall have three (3) component lists: A, B, and C:

a) List A shall enumerate the areas of activities reserved to Philippine nationals by mandate of the Constitution and specific laws.

b) List B shall contain the areas of activities and enterprises pursuant to law:

1. Which are defense-related activities, requiring prior clearance and authorization from Department of National Defense (DND) to engage in such activity, such as the manufacture, repair, storage and/or distribution of firearms, ammunition, lethal weapons, military ordnance, explosives, pyrotechnics and similar materials; unless such manufacturing or repair activity is specifically authorized, with a substantial export component, to a non-Philippine national by the Secretary of National Defense; or

2. Which have implications on public health and morals, such as the manufacture and distribution of dangerous drugs; all forms of gambling; nightclubs, bars, beerhouses, dance halls; sauna and steambath houses and massage clinics.

Small and medium-sized domestic market enterprises with paid-in equity capital less than the equivalent of five hundred thousand US dollars

(US$500,000) are reserved to Philippine nationals, unless they involve advanced technology as determined by the Department of Science and Technology. Export enterprises which utilize raw materials from depleting natural resources, with paid-in equity capital of less than the equivalent of five hundred thousand US dollars (US$500,000) are likewise reserved to Philippine nationals.

Amendments to List B may be made upon recommendation of the Secretary of National Defense, or the Secretary of Health, or the Secretary of Education, Culture and Sports, indorsed by the NEDA, or upon recommendation motu propio of NEDA, approved by the President, and promulgated by Presidential Proclamation. 5. Section 14. Administrative Sanctions. - A person who violates any provision of this Act or of the terms and conditions of registration or of the rules and regulations issued pursuant thereto, or aids or abets in any manner any violation shall be subject to a fine not exceeding One hundred thousand pesos (P100,000). If the offense is committed by a juridical entity, it shall be subject to a fine in an amount not exceeding of 1% of total paid-in capital but not more than Five million pesos (P5,000,000). The president and/or officials responsible therefor shall also be subject to a fine not exceeding Two hundred thousand pesos (P200,000). In addition to the foregoing, any person, firm or juridical entity involved shall be subject to forfeiture of all benefits granted under this Act. SEC shall have the power to impose administrative sanctions as provided herein for any violation of this Act or its implementing rules and regulations. Investor Protection Investors rights are protected under the Insolvency Law and the Civil Code. C. RA 10142, Financial Rehabilitation and Insolvency Act (FRIA) of 2010

Purpose is to encourage debtors, both juridical and natural persons, and their creditors to collectively and realistically resolve and adjust competing claims and property rights. The rehabilitation or liquidation shall be made with a view to ensure or maintain certainly and predictability in commercial affairs, preserve and maximize the value of the assets of these debtors, recognize creditor rights and respect priority of claims, and ensure equitable treatment of creditors who are similarly situated.

When rehabilitation is not feasible, it is in the interest of the State to facilities a speedy and orderly liquidation of these debtor's assets and the settlement of their obligations. Rehabilitation shall refer to the restoration of the debtor to a condition of successful operation and solvency, if it is shown that its continuance of operation is economically feasible and its creditors can recover by way of the present value of payments projected in the plan, more if the debtor continues as a going concern than if it is immediately liquidated. 1. Section 10. Liability of Individual Debtor, Owner of a Sole Proprietorship, Partners in a Partnership, or Directors and Officers. - Individual debtor, owner of a sole proprietorship, partners in a partnership, or directors and officers of a debtor shall be liable for double the value of the property sold, embezzled or disposed of or double the amount of the transaction involved, whichever is higher to be recovered for benefit of the debtor and the creditors, if they, having notice of the commencement of the proceedings, or having reason to believe that proceedings are about to be commenced, or in contemplation of the proceedings, willfully commit the following acts: (a) Dispose or cause to be disposed of any property of the debtor other than in the ordinary course of business or authorize or approve any transaction in fraud of creditors or in a manner grossly disadvantageous to the debtor and/or creditors; or (b) Conceal or authorize or approve the concealment, from the creditors, or embezzles or misappropriates, any property of the debtor. The court shall determine the extent of the liability of an owner, partner, director or officer under this section. In this connection, in case of partnerships and corporations, the court shall consider the amount of the shareholding or partnership or equity interest of such partner, director or officer, the degree of control of such partner, director or officer over the debtor, and the extent of the involvement of such partner, director or debtor in the actual management of the operations of the debtor. 2.Section 145. Penalties. - An owner, partner, director, officer or other employee of the debtor who commits any one of the following acts shall, upon conviction thereof, be punished by a fine of not more than One million pesos (Php 1, 000,000.00) and imprisonment for not less than three(3) months nor more than five (5) years for each offense; (a) if he shall, having notice of the commencement of the proceedings, or having reason to believe that proceedings are about to be commented, or in contemplation of the proceedings hide or conceal, or destroy or cause to be destroyed or hidden any property belonging to the debtor or if he shall hide, destroy, after mutilate or falsify, or cause to be hidden, destroyed, altered, mutilated or falsified, any book, deed, document or writing relating thereto; if he shall, with intent to defraud the creditors of the debtor, make any payment sale, assignment, transfer or conveyance of any property belongings to the debtor (b) if he shall, having knowledge belief of any person having proved a false or fictitious claim against the debtor, fail to disclose the same to the rehabilitation receiver of liquidator within one (1) month after coming to said

knowledge or belief; or if he shall attempt to account for any of the debtors property by fictitious losses or expense; or (c) if he shall knowingly violate a prohibition or knowingly fail to undertake an obligation established by this Act. C. Civil Code

1) 2) 3) 4)

Obligations and Contracts Assignment of Credits and Other Incorporeal Rights Concurrence and Preference of Credits Trusts

ADVENT CAPITAL VS. ALCANTARA G.R. No. 183050 January 25, 2012 FACTS: Advent Capital and Finance Corporation filed a petition for rehabilitation with the RTC. The RTC named Atty. Danilo L. Concepcion as rehabilitation receiver. Upon audit of Advent Capitals books, Atty. Concepcion found that respondents Nicasio and Editha Alcantara owed Advent Capital P27,398,026.59, representing trust fees that it supposedly earned for managing their several trust accounts. Prompted by this finding, Atty. Concepcion requested Belson Securities, Inc. to deliver to him, as Advent Capitals rehabilitation receiver, the P7,635,597.50 in cash dividends that Belson held under the Alcantaras Trust Account, claiming that the dividends, as trust fees, formed part of Advent Capitals assets. ISSUE: W/N the cash dividends held by Belson and claimed by both the Alcantaras and Advent Capital constitute corporate assets of the latter that the rehabilitation court may, upon motion, require to be conveyed to the rehabilitation receiver for his disposition. HELD: The real owner of the trust property is the trustor-beneficiary. In this case, the trustors-beneficiaries are the Alcantaras. Thus, Advent Capital could not dispose of the Alcantaras portfolio on its own. The income and principal of the portfolio could only be withdrawn upon the Alcantaras written instruction or order to Advent Capital. The latter could not also assign or encumber the portfolio or its income without the written consent of the Alcantaras. All these are stipulated in the Trust Agreement. Advent Capital must file a separate action for collection to recover the trust fees that it allegedly earned and, with the trial courts authorization if warranted, put the money in escrow for payment to whoever it rightly belongs. Having failed to collect the trust fees at the end of each calendar quarter as stated in the contract, all it had against the Alcantaras was a claim for payment which is a proper subject for an ordinary action for collection. It cannot enforce its money claim by simply filing a motion in the rehabilitation case for delivery of money belonging to the Alcantaras but in the possession of a third party.

Rehabilitation proceedings are summary and non-adversarial in nature, and do not contemplate adjudication of claims that must be threshed out in ordinary court proceedings D. Tax INTEREST EARNINGS from long-term deposits or investments are exempted from income tax as long as these have a maturity period of not less than five years. Revenue Memorandum Circular No. 18-2011 dated April 12 reiterated that long-term deposits or investments were exempted from the usual 20% tax on interest income. The deposits or investments covered by this rule are: time deposits or investments in the form of savings, common or individual trust funds, deposit substitutes and investment management accounts. The income tax exemption can only be enjoyed by depositors and investors that are individual citizens or aliens -- both resident and non-resident -- engaged in trade or business in the Philippines, and not corporations. The long-term deposits or investment certificates also have to be under the name of the individual and not a corporation, bank or trust department of a bank. A 20% tax on interest income will be imposed on long-term deposits or investments terminated in less than three years. However, if these are kept for three years to less than four years, the tax is scaled down to 12%; and to 5% if four years to less than five years.

The incentive is to encourage savings and ensure that savings are maintained in the Philippines and in the banking system continuously over a long period. It avoids sudden withdrawals because of the risk that the funds will be invested out of the country or just kept at home or spent on consumer items. 1 . SEC. 24. Income Tax Rates. (NIRC) (B) Rate of Tax on Certain Passive Income. (1) Interests, Royalties, Prizes, and Other Winnings. - A final tax at the rate of twenty percent (20%) is hereby imposed upon the amount of interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements; XXX (2) Cash and/or Property Dividends - A final tax at the following rates shall be imposed upon the cash and/or property dividends actually or constructively received

by an individual from a domestic corporation or from a joint stock company, insurance or mutual fund companies and regional operating headquarters of multinational companies, or on the share of an individual in the distributable net income after tax of a partnership (except a general professional partnership) of which he is a partner, or on the share of an individual in the net income after tax of an association, a joint account, or a joint venture or consortium taxable as a corporation of which he is a member or co-venturer.

Six Eight

percent (6%) beginning January 1, 1998; percent (8%) beginning January 1, 1999;

Ten percent (10% beginning January 1, 2000. Provided, however, That interest income received by an individual taxpayer (except a nonresident individual) from a depository bank under the expanded foreign currency deposit system shall be subject to a final income tax at the rate of seven and one-half percent (7 1/2%) of such interest income: Provided, further, That interest income from long-term deposit or investment in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments evidenced by certificates in such form prescribed by the Bangko Sentral ng Pilipinas (BSP) shall be exempt from the tax imposed under this Subsection: Provided, finally, That should the holder of the certificate pre-terminate the deposit or investment before the fifth (5th) year, a final tax shall be imposed on the entire income and shall be deducted and withheld by the depository bank from the proceeds of the long-term deposit or investment certificate based on the remaining maturity thereof: Four (4) years to less than five (5) years - 5%; Three (3) years to less than (4) years - 12%; and Less than three (3) years - 20% C) Capital Gains from Sale of Shares of Stock not traded in the Stock Exchange. The provisions of Section 39(B) notwithstanding, a final tax at the rates prescribed below is hereby imposed upon the net capital gains realized during the taxable year from the sale, barter, exchange or other disposition of shares of stock in a domestic corporation, except shares sold, or disposed of through the stock exchange. Not over P100,0005% on P100,000 10% any amount in excess of

TOURISM INVESTMENT LAWS AND INCENTIVES (EXECUTIVE ORDER NO. 63)

Grants incentives to foreigners investing at least US$50,000 in a tourist-related project or in any tourist establishment as determined by the Committee created in the same law.

In the determination of the areas of investments, the Committee shall take into consideration the following criteria: 1. the investment shall promote the development of the tourism industry, shall provide more opportunities for employment, and shall increase the country's national income. 2. The Committee shall give priority to the disposal of non-performing tourismoriented assets of the government. INCENTIVES GRANTED TO INVESTORS

Special Investor Resident Visa.

The investor, his wife and unmarried minor children shall be permitted to enter and reside in the Philippines as special investor residents for as long as the investment subsists: Provided, That (1) they have not been convicted of a crime involving moral turpitude; (2) they are not afflicted with any loathsome, dangerous or contagious disease; and (3) they have not been institutionalized for any mental disorder or disability; and

Provided, further, That the said investor visits the country at least twice a year and stays in the country at least seven (7) days for each visit. The said investor, his wife and unmarried minor children shall be issued a multiple entry special investor resident visa to enter and leave the Philippines without further documentary requirements other than valid passports or other travel documents in the nature of passports. They shall be exempt from payment of alien immigration and registration fees and from securing alien certificates of registration. Remittance of Earnings.

The investor shall have the right to remit earnings from the investment in the currency in which the investment was originally made and at the exchange rate prevailing at the time of remittance, subject to the provisions of Section 74 of Republic Act No. 265, as amended: Provided, That the investment is registered with the Central Bank, and reported to and registered with the Board of Investments. Repatriation of Proceeds

The investor shall have the right to repatriate the entire proceeds of the liquidation of the investments in the currency in which the investment was originally made and at the exchange rate prevailing at the time of repatriation, subject to the provisions of Section 74 of Republic Act 265, as amended. Right of Succession

In case of death, the surviving immediate family shall be entitled to the same privileges.

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