DOF prepares ‘hybrid’ plan to increase capital of UCPB

Following the collapse of an earlier plan to recapitalize the United Coconut Planters Bank (UCPB), finance officials said a "hybrid" plan would be ready by June this year that would provide a long-term solution to the bank’s inability to boost its capital and improve its financial standing.

Finance Secretary Jose Isidro Camacho told reporters that the plan is still being ironed out, but he expressed optimism that it would be ready by the end of the first semester to pave the way for the recapitalization of the bank without compromising any of the ownership claims still pending for court resolution.

Camacho declined to reveal any detail of the proposed plan but he said it is a "long-term solution" and would "substantially address" UCPB’s capitalization problem.

It was reported earlier that UCPB was planning a tier 2 offer but Camacho said the plan was not "strictly a tier 2 offer", hinting broadly that some hybrid form of tier 1 capital would be raised to boost UCPB’s faltering capital base.

"Let’s see how the on-going discussions will turn out," Camacho said.

According to Camacho, a significant agreement has been reached earlier where all the parties conceded the fact that UCPB was in dire need of recapitalization although it was unclear how it could be done without having an impact on all the pending ownership claims.

The only recourse available to UCPB was to offer tier 1 notes which would make it possible for the bank to raise capital without diluting any of its shareholders. However, such a plan would require the approval of the bank’s shareholders and since the court has yet to resolve who the actual shareholders were, even this would not be possible unless it would be in some hybrid form that could skirt around this requirement.

Sources privy to the on-going negotiations said bank management, government representatives and various claimants of the coconut levy had originally agreed on a plan to separate the coconut levy fund from the bank itself to allow new investors to come in with much-needed capital.

According to the source, a plan was also laid out to spin off UCPB’s bad assets in order to separate the good bank from the bad bank.

However, this plan was shot down by the claimants who refused to sign the agreement that would make this possible. "They didn’t know what they were giving up so it didn’t fall through," the source said.

The source said the parties did not want to preempt the judgment of the Sandigangbayan, the graft court where the ownership case is still pending.

Aside from the Sandigangbayan, the Supreme Court also has to rule on the decades-old question of whether the coconut levy fund is public or private. If the SC rules that it is public, it will immediately go to the national coffers. Otherwise, the court will have to further sort out the claims of various coconut farmers’ groups who purport to have rights to the proceeds of the multi-billion peso fund.

UCPB has emerged with the weakest capital base in the entire commercial banking industry, as its capital ratio continued to decline in 2002.

Data from the Bangko Sentral ng Pilipinas (BSP) showed that UCPB’s total equity as a percentage of its total assets declined to 2.89 percent as of its Dec. 17, 2002 statement of condition.

The capital ratio is an indication of a bank’s capital base and whether it would be enough to absorb large-scale loan defaults and radical declines in its asset price.

The BSP explained that the capital ratio "broadly approximates" UCPB’s capital adequacy ratio (CAR) which measures the bank’s equity as a percentage of its risk assets.

Under the BSP rules, banks are required to maintain a minimum of 10 percent capital adequacy ratio to ensure that their pockets are deep enough to survive even the worst case scenario.

At the end of 2002, UCPB was capitalized at only P2.85 billion which was used to support total assets of P98.6 billion. By the end of 2002, UCPB’s capital was half of its P5.78 billion in the previous year.

The UCPB, however, has been having problems boosting its capital due to the perennial and unresolved question of ownership that stemmed from the sequestration of the coconut levy funds which was used to initially capitalize the bank.