By MAX ESTAYO

The government yesterday reported a successful launch of derivatives on $2 billion bonds. It raised $15 million (P600 million) more from the paired warrants it issued.

The paired warrants is different from the current 5-year credit default swaps insurance-like contracts on government bonds protect against defaults of restructuring.

The paired warrants were issued by the national government so that in an unlikely event of default, will enable the holders of dollar-denominated bonds to swap said bonds for local-currency bonds.

The warrants or the credit default swaps is similar to the small fee customers pay for three-year guarantee on appliances bought on installment.

The paired warrants ease the capital charge on the government bonds (ROPs), which banks dislike because it requires them to set aside a portion of their capital to support holding of the bonds. Under Basel 2, the dollar bonds are 100-percent risk weighted.

When banks buy the warrants and pair them with the ROPs and hence become eligible for conversion to peso bonds, the bonds become zero risk-weighted.

Under Basel 2, peso bonds issued by the national government remain free of capital charge.

The warrants are actually an insurance that ROP holders will get back their investments in case the national government runs out of dollars to pay up its obligations.

Finance undersecretary and acting national treasurer Roberto Tan said banks bought warrants for $2 billion worth of government-issued dollar denominated bonds, at a price of $7.50 per $1,000 worth of securities.

The government concluded on Feb. 22 the sale of the warrants, which began on Feb. 20. The sale was done through a Dutch auction or online submission of bids.

Swiss bank Credit Suisse helped the government in the sale.

"We are heartened by the strong and broad support for this innovative issue. Investors bought into the benefits of the warrants – especially their ability to make it more attractive to invest in the Republic’s debt given the country’s improving credit fundamentals," Tan said.