Special Purpose Vehicles and insolvency reforms in the Philippines

Special Purpose Vehicles and insolvency reforms in the Philippines

Unlike other Asian countries, the Philippines had not really had major reforms in its insolvency procedures since the Asian crisis. About the only major changes in the Philippine legal landscape that relate to nonperforming loans (NPLs) and corporate bankruptcies are: 1) the transfer of jurisdiction over corporate rehabilitation cases from the Securities and Exchange Commission (SEC), a quasi-judicial government body, to the Regional Trial Courts (RTCs) in 2000; and 2) the signing of the Special Purpose Vehicle (SPV) Act, which provides fiscal incentives for banks to solve their NPL problems, in January 2003. Thus while the other severely affected countries like Indonesia and Thailand had taken advantage of the crisis to modernize their insolvency laws, the Philippines still awaits the dawn for major legal bankruptcy reforms.

This paper focuses on the legal environment, particularly the insolvency system, that would influence the success of Philippine Special Purpose Vehicles (SPVs), also known as asset management companies (AMCs) in other countries. Since SPVs will have to operate under a given insolvency regime after they acquire the bad assets, existing bankruptcy procedures have an impact on SPV behavior, ex-ante. In particular, it influences the price that SPVs offer for the NPAs that, in turn, affects the banks’ willingness to sell, and thus the achievement of the government goal of banks’ bad loans clean-up.

The paper discusses the features of the SPV Act, the pace of bad asset transfers to SPVs, the current rehabilitation procedures, and the proposed legal bankruptcy reforms that would affect the effectiveness of SPVs.

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