Banks defer Tier 2 offers due to FATF sanctions

Despite the need to raise capital, banks have decided to postpone their Tier 2 offers in anticipation of the market backlash stemming from the sanctions imposed by the Financial Action Task Force (FATF) on the Philippines.

The Bangko Sentral ng Pilipinas (BSP) said that banks have advised monetary officials of their decision to postpone all plans to raise Tier 2 capital, saying that they are not likely to get good terms given the market’s initial reaction to the FATF sanctions.

BSP Deputy Governor Alberto Reyes told reporters that immediately after the FATF decision, banks did not think it would be a good time to push through with plans to raise Tier 2 capital.

At least four banks have pending plans to raise Tier 2 capital, led by Land Bank of the Philippines which is planning a $100-million offer. Rizal Commercial Banking Corp. (RCBC) is also planning to issue P3.6- billion worth of 10-year notes in denominations of either P500,000 or $10,000 which will be due and demandable in five and a half years.

Aside from RCBC, Equitable PCI Bank is also planning to float $200 million and P6- billion worth of peso bonds to complete its Tier 2 offer to beef up its capital.

Equitable-PCI’s Bank’s dollar bonds were to mature in 2012 while the peso bonds would be issued sometime in the first quarter of 2003 and carry a five-year maturity or any such term to be decided by the bank.

Equitable-PCI has appointed the Manila office of Deutsche Bank and UBS Warburg as underwriters. Reyes said the dollar bonds would be listed at the Singapore Stock Exchange.

The Monetary Board (MB) has also approved Bangko de Oro’s $20-million bond offer to be taken up wholly by the International Finance Corp., the investment arm of the World Bank.

The bond proceeds would be used by BDO as Tier 2 capital, to be convertible directly into equity within two years. The offer was intended to help BDO beef up its capital as the bank embarks on an expansion plan that followed its acquisition of First E-bank earlier this year.

Tier 2 capital is essentially a subordinated debt, representing an investment that has the aspects of a deposit since it earns a pre-determined rate. However, Tier 2 capital is unlike shares of stocks that gains or loses value according to the issuer’s financial performance.

Tier 2 notes is a form of long-term borrowing convertible into equity shares upon maturity. Under BSP rules, Tier 2 capital is classified into either upper or lower Tier 2, where upper Tier 2 are 10-year tenors and have higher priority in case of default. Lower Tier 2, on the other hand, mature in five years.

Banks are allowed to raise upper Tier 2 capital equivalent to 100 percent of their Tier 1 capital while lower Tier 2 should be equivalent to a maximum of 50 percent of their Tier 1 capital.

Tier 2 capital is favored by banks since it allows them to increase their capital without diluting existing shareholders. Unlike Tier 1 capital, however, Tier 2 capital represent subordinated loan that the bank would have to either pay back or convert into shares upon maturity. – Des Ferriols