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THE MRT 3 CONTRACT

Atty. Helena C. Tolentino 1 June 2012

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Contracts in General
What is a contract? A contract is a meeting of minds between two persons whereby one binds himself, with respect to the other, to give something or to render some service. (Art. 1305, Civil Code) The contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy.
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Contracts in General
Parties- two or more Understanding- Covenant To do (or not to do) Cause (why?) Object (what?)

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The MRT Contract

Background: Parties : Agreement : What : Why :

DOTC (Sec. Enrile) awarded contract to MRTC Hong Kong (Sobrepena) Build, lease and transfer MRT System 23,000 passengers per hour per direction in EDSA

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Contract Undertakings
Legal Basis : BOT Law Major Consideration: MRTC did not have a franchise to operate the system DOTC to hold the franchise to operate MRTC to own the system; DOTC to lease the system Relevance: Constitutional requirement on franchises on public utilities
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Main Covenants
MRTC build system maintain and guarantee availability of trains procure spare parts DOTC operate system collect fares pays MRTC monthly lease fees for number of years
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Financing of MRT
Equity : US$ 190 million Financing : US$ 465 million Japan Export Import Bank (JExIm) Bank of Tokyo-Mitsubishi Postal Bank of the Czech Republic Czech Export Credit Agency Other Commercial Banks
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The MRT Route

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Rental Payments
Rental Payments Cover:
Loan Amortization JExIm; Czech; Commercial Equity payment Fixed and guaranteed Economic Return (15%) ALL EXPENSES RELATED TO THE CONSTRUCTION, MAINTENANCE AND OPERATION OF THE SYSTEM Sovereign guarantee Appropriately increased or decreased to preserve Metro Rails Net Economic Return
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JExIm Bank

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Czech Facility

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Commercial Loans

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Equity

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Net Economic Return

Net Economic Return means the return to be realized by Metro Rail over the life of this Agreement of the amount of its equity investments into LRTS Phase I together with 15% per annum thereon, such return to computed using standard internal rate of return methodology and the same assumptions as were utilized in determining the Rental Fees set forth in table 2 of Annex A-1 on the date hereof x x .
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Internal Rate of Return

IRR : discount rate that would make a project's NPV equal zero. Ceteris Paribus, given two projects, the project with a higher IRR would be preferred over the other. Expected equity IRR expected return of an investor when he/she invested in the project.
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Why the 15%?

A premium over equity IRR is given when the latter is below market rate such that without the premium, no investor will invest in the project. NC Ricky Lozari (thought bubble) Not sure where 15% came from but it may have come from the economic rate of return of 15% required by NEDA to all of its projects ... the logic may have been, that society is willing to pay the investors 15% on top of the equity IRR, just so the project will push through.
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Rental Fees
Under any and all circumstances Rental Fees are: UNCONDITIONAL IRREVOCABLE Shall in NO WAY be released, discharged or otherwise affected for ANY REASON

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Summary: Payments due to MRTC

Rental Fee (9.1) to cover: Loans to lenders: JExIm; Czech Republic EGI, ECA FACILITY; Commercial FCDU (Table 1) For equity (Table 2) Commitment fees, Taxes Claims Premiums for risk insurance Any other amount owing under the Financing Agreements Adjustments
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Summary: Payments due to MRTC (2)

Maintenance Fees (Maintenance Agreement) MRTC Administration costs Reimburse Corporate Income Tax (9.3) Reimburse withholding taxes, business taxes, real estate taxes (9.3)

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Fares and Revenue

1997 9.2. DOTC agrees that it shall at all times set passenger fares on LRTS Phase I such that the average fare paid by each passenger shall be at least 15 pesos per ride, x x x

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Fare Increases
Makati City, Dec. 6, 1999 The Metro Rail Transit (MRT) 3 has come up with a distance-related fare, which is competitive with other commuter vehicles plying the EDSA route. The Metro Star Express fares start at P17 for the shortest trips and P34 for the maximum distance, between North Avenue in Quezon City and Buendia Avenue in Makati.

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No Fare Increase
Then President Joseph Estrada ordered a rollback of a 5 peso increase in MRT fares and there has not been any increase since then causing the MRT system to be heavily subsidized by the NG

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The MRT Bonds

The 1997 Asian Financial Crisis caused the Sobrepena corporations in real estate and preneed to cash in on the equity rental payments (ERPs) of MRT 3. In 2003 the corporate owners of the MRT issued asset-backed bonds for its future ERPs. This was done through a new SPV, MRT III Funding Corporation, Ltd.
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The MRT Bonds

US$66,000,000 9.50% Tranche 1 due 2007 US$30,972,000 zero-coupon Tranche 2-A due 2008 US$30,972,000 zero-coupon Tranche 2-B due 2009 US$33,885,000 zero-coupon Tranche 2-C due 2010 US$81,464,000 zero-coupon Tranche 2-D due 2011 US$99,913,000 zero-coupon Tranche 2-E due 2012 US$100,884,000 zero-coupon Tranche 2-F due 2013 US$100,884,000 zero-coupon Tranche 2-G due 2014 US$1,197,155,660 Pass-through Tranche 3 due 2025
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The MRT Bonds (Notes)

Described by the Issuers as: backed by future dividends from MRTC, arising from equity rental payments (ERPs) The ERPs described as direct obligation of the DOTC The ERPs are direct, unconditional, and general obligations of the government DOTCs obligations under the project agreement carry the full faith and credit of the ROP.
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Government Situation
At this point, the NG was beginning to fall behind in its lease and maintenance payments. 2004 : DOTC signs Restructuring, Repayment and Forbearance Agreement (RRFA) with Sumitomo Corporation for maintenance fees 2005: Interagency committee was formed to study the governments options for MRT III. 2005: Ayala Group sells equity to Goldman Sachs

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Government Assumption of Loans

The NG began paying the loans of MRTC in 2006
Payments made in Millions PHP 2010 1216.46 2009 1966.80 2008 3948.21 2007 2007.87 2006 1398.00 Total 10537.34

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COA Report
However, total figures per COA show PHP 32.08 Billion (USD 632million) for debt servicing on the basis of the Build-Lease-Transfer Agreement and the DOF Letter of Undertaking.

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Land Bank
November 2008: Land Bank approved the purchase of MRTC interests in the form of: Unsecuretized Equity Rental Payments Preference Shares Notes As of December 31, 2009: LBP interest in MRTC was USD376.87 million.

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DBP
DBPs outstanding investments in MRTC bonds on the other hand have a face value of US$676.25 million.

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Executive Order 855

January 2010: President Arroyo ordered the National Development Corporation on its own or in partnership with other entities to acquire economic interest in MRTC in the form of shares The NDC has not been able to complete the purchase of the bonds from LBP and MBP and the government has received offers from MPIC for MRT 3.

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Original Investors of MRTC

ORIGINAL INVESTORS OF MRT:
MRT Holdings 1 - 84.9 Ayala 23; FEL 18.6; Anglo 18.6; Rail Co. 18.6; Sheridan LRT 16; DBH Realty 5; Fil Estate Management 12.65 Others 2.5

MRT Holdings II

MRTC

MRT EDSA Line

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Economic Interests in MRTC

THE MRT BONDS
MRT Holdings 1 - 84.9 Ayala 23; FEL 18.6; Anglo 18.6; Rail Co. 18.6; Sheridan LRT 16; DBH Realty 5; Fil Estate Management 12.65 Others 2.5

Goldman Sachs MRT Holdings III DIVIDENDS FOR 25 YEARS Elliot Holdings MRT Holdings II DBP/ LandBank

MRTC

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The entry of MPIC

With the Entry of MPIC
MRT Holdings 1 - 84.9 LBP/DBP 19.9 ; (FEL) MPIC 18.6; Anglo (MPIC) 18.6 ; Rail Co. 18.6; Sheridan LRT 16; LBP/DBP 4.8 (MPIC/DBH? 5) FEL Prop (MPIC) - 8.7 FELI (MPIC) - 4 Rail Systems, Inc. 1.4 Rapid Urban 1

Goldman Sachs MRT Holdings III DIVIDENDS FOR 25 YEARS Elliot Holdings MRT Holdings II DBP/ LandBank

MRTC

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Operations Subsidies by NG
For the year 2012 : DBM has allotted the amount PhP 4.289 Billion To cover : Deficiency between the projected revenues P2,814,625,000 and obligations under the BLT agreement for MRT 3 P7,104,490,000

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Moving forward.

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AFCS
Legal Considerations : MRTC owns the current AFCS facilities. BLT contract provisions to be studied Financial Considerations: ERPs remain despite enhancement

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AFCS Options
Financial: Force MRTC to replace the AFCS with working ones Legal: Judicial determination on the state of the facilities (leased? owned?) Consider maintenance contract between Sumitomo and DOTC (not MRTC) The future maintenance contract to be bid out by DOTC (not MRTC)
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THANK YOU!!!

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