In a resolution filed by Senator Teresa Aquino-Oreta, she called for a probe on the "hush-hush" manner by which the Bureau of Treasury (BTr) issued the zeros, dubbed Poverty Eradication and Alleviation Certificates (PEACe) bonds.

Zeros are bonds that pay no interest periodically and are issued at a high discount of face value. In this case, the zero had a 10-year maturity hence, the borrower, which is the government, would only pay the interest by the end of the 10th year. So, instead of paying interest annually or semi-annually, similar to other debts instruments, the government could instead use the money to bridge budget deficit.

Sen. Oreta argued that the inquiry would help clear legal and ethical questions about the transaction, especially on the alleged questionnable involvement of Finance Secretary Jose Isidro N. Camacho and her sister, Ma. Socorro Camacho-Reyes who chairs the CODE-NGO.

CODE-NGO, an umbrella organization of 2,500 NGOs, people's organization and cooperatives nationwide bought PhP10.169 billion in 10-year zero coupon bonds, or zeros issued by the Philippine government in an auction last October 2001, via an underwriting agreement with RCBC Capital Corporation.

One allegation against CODE-NGO is influence peddling or rent-seeking, apparently because, this is an NGO network chaired by the Finance secretary's sister who earned over a billion peso transaction, though not directly, with an agency under the Department of Finance.

However, Ms. Camacho-Reyes said she sought for help from her brother but to no avail because, his brother was busy and was about to go abroad at that time.

Another allegation in the ongoing Senate Finance Committee investigation on the Poverty Eradication and Alleviation Certificates (PEACe) bonds was that the Philipine government was at a disadvantage in the transaction.

Sen. Oreta pointed out that the government could have lost five billion Philippine pesos (US$97.456 million at PhP51.305=$1) due to the 20% deal's withholding tax exemption.

However, Mr. Edeza said that the government did not lose a single centavo from the October 16, 2001 auction, instead, saved billions of pesos due to the lower interest for the zeros.

Mr. Edeza further argued that the 20% tax exemption would be considered, then the prevailing 16.93% prevailing market price on the 10-year bond will fall to 14.14%. With the reserve eligibility, which was priced by the BSP at 0.50% factored-in, the yeild will further fall to 13.64%, or that BTr can expect bids at this particular level.

The CODE-NGO was working for a negotiated sale of the zeros, but was turned down by the BTr opting for an auction, however won in the auction.

RCBC then submitted bids ranging from 12.25% to 12.75% for PhP35 billion, with the bank offering to lend the government PhP10.17 billion to get paid PhP35 billion after 10 years.

The auction committee composed of the Finance Secretary, National Treasurer, two deputy treasurers and one representative each coming from the Finance department, Securities and Exchange Commission and Bangko Sentral ng Pilipinas, decides which bid or bids are most advantageous to the government.

The Treasury used a Dutch auction or uniform price auction, where the yeild or interest is pegged at a minimum level that would realize the issuer the desired proceeds at the cut-off yeild. In this particular case, after reviewing the bid, the auction committee pegged the cut-off yeild at 12.75% or lower. But GSEDs that bid lower that 12.75% would also have to buy th zeros at 12.75%, in line with the uniform price rule.

In a presentation during a Senate Finance Committee hearing, Mr. Edeza reported that the BTr received a total of 45 bids from 15 GSEDs. The bids yeilds ranged from 12.248% to 18%, with the total tender of PhP137.08 billion exceeding the PhP50 billion maximum amount that the BTr was authorized to issue.

It was ony the RCBC that had a bid ranging from 12.25% to 2.75%, it thus won the auction. Other GSEDs on one hand submitted bids at 13% or higher and were rejected. GSEDs however are allowed to submit multiple bids.

PROJECTED AMOUNT FROM THE OCTOBER 16 AUCTION

Bidders(comprised 15 bids from 15 GSEDs	%	Total Tender	After a span of 10 years
CODE-NGO via RCBC	12.25-12.75**	PhP10.169 billion	PhP35 billion
other GSEDs	12.248-18	PhP137.08 billion*	PhP50 billion

* exceeds the PhP50 billion amount the BTr was authorized to issue. **cut-off yeild -- Based on the BSP computations

Mr. Edeza noted, that during the auction, the auction committee saw only the yeilds or interest rates and volumes (the corresponding amount) submitted, without the names of the bidders. It was after the computer sorted out the bid yeilds from lowest to highest. The committee then decided to place the cut-off yeild at 12.75% and awarded the zeros to GSEDs that placed bids from 12.75 or lower, without knowing who these GSEDs were.

On that same day, CODE through RCBC, resold the instrument at a higher price where an amount of PhP1.827 billion windfall occurred, PhP1.338 illion of which went to an endowment fund.

The October 16 auction is said to be the first time the Bureau of Treasury auctioned zeros.

CODE-NGO's original proposal was to buy bonds, packaged it with sweeteners and resell them again as NGO bonds. The so-called windfall would then create an endowment fund for the Peace and Equity Foundation that would fund NGO poverty alleviation projects.

According to Cesar M. Mayo, Jr., CODE-NGO's financial adviser, since the CODE-NGO needed more than a billion pesos to create an endowment fund, wherein only the interest is used to fund anti-poverty pojects, but the principal is kept intact, zeros were said to be the best instruments.

CODE-NGO needed to secure a tax exemption and other eligibilities, or sweeteners for the zeros, to make them more attractive to the secondary market. It was however crucial that tese bonds be sold exclusively to CODE-NGO at negotitiod sale, otherwise CODE-NGO and its underwriter will not have a product to sell in the first place.

So, on March 3, 2001, CODE-NGO requested then Finance Secretary Alberto Romulo for the issuance of the zeros. Mr Romulo then told them to raise the proposal to Natonal Treasurer Sergio G. Edeza since the Bureau of Treasury was in-charge of issuing bonds.

When they finally met with BSP, the CODE-NGO's poverty alleviation objective gave encouraging results form Monetary Board, the BSP's highest policy-making body. However, they did not get the BSP's endorsement. The NGO network then eyed three eligibilities from the board: the zeros be recognized as a small business compliance, as reserve liquidity, and as banks compliance to the Agri- Agra law. But BSP rejected the proposals because CODE-NGO is a private entity. Mr. Edeza told them that an NGO could not buy bonds as only GSEDs are authorized to transact with the agency.