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-PhilRatings sets issuer rating to LGU Guarantee Corp.

BANKING AND CREDIT NEWS-November 17, 2010--PhilRatings sets issuer rating to LGU Guarantee Corp(C)2010 M2 COMMUNICATIONS

17 November 2010 - Philippine Rating Services (PhilRatings) said it assigned a PRS Aa plus (corp) issuer credit rating to LGU Guarantee Corp, a guarantor of debts of Philippine local government units (LGUs).

The agency issued the following press release:

LGUGC, a pioneering institution that guarantees LGU debt financing in the Philippines, obtained a PRS Aa plus (corp.) issuer credit rating from Philippine Rating Services Corporation (PhilRatings). According to PhilRatings, a company rated PRS Aa (corp.) differs from the highest rated corporates only to a small degree, and has a STRONG capacity to meet its financial commitments relative to that of other Philippine corporates. A plus or a minus sign is added to further qualify the ratings.

PhilRatings' ratings are based on available information and projections at the time that the rating is on-going. PhilRatings shall continuously monitor developments relating to LGUGC and may change the rating at any time, should circumstances warrant a change.

PhilRatings said that the ratings primarily considered the ability of LGUGC to consistently generate cash as a result of continuing profitable operations, the absence of any default on guaranteed financial obligations, and the debt-free situation of the company to date. Such has also allowed the company to pay dividends and increase its investment funds.

LGUGC's broadly diversified investment structure complies with sound and tested investment policies and guidelines, and provides LGUGC with enough protection in terms of liquidity, profitability, and stability in the event of an economic downturn. It also strengthens the company's ability to honor its guarantee commitments in the event of a default by an institution whose financial obligations have been guaranteed.

LGUGC's default-free status since it started its operations in 1998 may partly be attributed to the company's adherence to its customized and calibrated Manual of Guarantee Operations and Portfolio Risk Management Manual that have been audited and approved by three institutional stakeholders, namely: the Asian Development Bank (ADB), the United States Agency for International Development (USAID) and the World Bank (WB). The company also has adequate mechanisms (i.e. co-guarantee agreements with USAID, collateral requirements, sinking fund requirement, reserve fund requirement) to cushion the company against debtor default. Default risk is further minimized since LGUGC undertakes to pay only the guaranteed portion of the past due amortizations and the succeeding amortizations as these fall due rather than having to pay the entire outstanding guaranteed amount.

LGUGC has ample reserves to cover probable losses in relation to outstanding guarantees; a strong capital cushion which enables the company to accommodate a higher level of guarantees; and multiple layers of financial flexibility which can be tapped to enhance liquidity and guarantee claims payment capability. The company's strong institutional linkages and shareholders; sustainable profitable operations, with higher opportunity for growth; as well as the experience and track record of key members of the Board and of management, particularly in terms of banking and guarantee operations, were also among the positive considerations that PhilRatings highlighted in arriving at the assigned credit rating.

LGUGC, however, faces increased competitive challenges in terms of expanding and developing new markets on a sustained basis. The company likewise faces the issue of "political risk" when dealing with local government units and/or government regulatory agencies. In addition, the company's resilience during a period of severe domestic economic stress has yet to be seen given the company's relatively short 12-year history.

LGUGC reported a 17.1% year-on-year growth in revenues of almost Php30.0 million for the first semester ended June 30, 2010. For the same comparative period, guarantee fees increased by 50.8% to Php11.8 million, while investment income also went up by 11.8% to Php17.2 million. Guaranteed debts for the first semester 2010 amounted to Php417.5 million compared to only Php70.0 million during the first semester 2009. Net profit margin (NPM) improved to 53.3% for the first semester 2010 from 50.9% during the same period last year.

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Publication:M2 Banking & Credit News (BCN)
Geographic Code:9PHIL
Date:Nov 17, 2010
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