LGUGC Keeps High Credit Rating

LGUGC-Philrating-2017-1

LGU Guarantee Corporation (LGUGC), the first private corporation to give financial guarantees to local
government units (LGUs) in the Philippines, kept its issuer rating of PRS Aa plus (corp.) from Philippine Rating
Services Corporation (PhilRatings).

An issuer rating is an opinion on the general and overall creditworthiness of the issuer, evaluating its ability
to meet all its financial obligations within a time horizon of one year. The focus is on financial strength and stability
under normal and stressed conditions to be able to meet existing and prospective financial obligations.

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” is
included to further qualify the rating.

The issuer rating for LGUGC takes into account the following rating considerations: the recognition of
LGUGC’s pioneering developmental role by other institutions, which serves as a strong foundation for linkages
between these institutions and LGUGC; the company’s highly-experienced management team; the well-managed
growth of expenses which allows ample coverage of the same from core revenues; and expectations of LGUGC’s
tempered profitability, going forward.

LGUGC continues to play an important role in the development of the LGU bond market in the country.
Incorporated in March 1998, the company’s clientele for its guarantees has since expanded to include water district
(WDs), electric cooperatives (ECs), medium and large enterprises (MLEs), state universities and colleges (SUCs),
renewable energy technology projects (RETPs), among others. The evolving needs of its more diversified client
base have led LGUGC to also go into other products and services, such as program management.

LGUGC’s entry into other markets and its offer of additional services positively benefits from the
company’s highly-experienced management team. The knowledge and experience of LGUGC’s management is also
particularly important in light of expectations that company profitability will be tempered, at least in the short-term.
PhilRatings believes that management’s knowledge and experience will be helpful, as LGUGC strives to keep a
balance between enhancing and further improving on its operations while addressing the evolving needs of its select
markets.

Guarantee fees, which account for the bulk of revenues, significantly declined by 26.9% to P15.7 million in
the first half of 2016. The drop in guarantee fees translated to a 31.3% decrease in pre-tax net income to P9.1
million, from P13.3 million in the same period of 2015. For 2016, guarantee fees are projected to decline despite
the growth in LGUGC’s guarantee portfolio, as the company implements lower guarantee fees and flexible terms of
guarantee fee payments in response to clients’ needs and market movements.

Despite lower revenues from its guarantee business, LGUGC is anticipated to keep ample coverage of its
expenses, as the latter’s growth remains well controlled by management. Forecast ratio of management and
program management fees to total expenses (including interest expenses) will be kept above 100.0%, and will be
higher than the ratio for each of the last three years (2013 to 2015). Expenses are expected to post an almost flat
growth in 2016.

Recognition of its pioneering developmental role and well-experienced management team has allowed
LGUGC to form strong linkages with other institutions which share the company’s social agenda. These alliances
are seen to provide support to LGUGC, amid challenges the company may face going forward. Historically,
benefits from these linkages have not been limited to the opening of new markets for LGUGC, but also included
having access to funding support and technical assistance