(a) Is it more usual for the financing needs of these types of corporates to be satisfied out of capital (equity) raisings; retained earnings; or external borrowings?

 

For medium and large scale enterprises, the most common form for satisfying their financing needs would be by way of contribution from the stockholders, in the form of either equity or advances, and by way of borrowings from financial institutions, including banks.

With capital raisings and retained earnings, there are certain provisions of our Corporation Code which might be a source of problems for such corporates. Section 39 Corporation code provides that "all stockholders of a corporation shall enjoy pre-emptive rights to subscribe to all issues or disposition of shares of any class, in proportion to their respective shareholdings, unless such right is denied by the articles of incorporation or an amendment thereto: x x x." Where pre-emptive rights exist, in the event there is a ready source willing to provide equity in the corporation, one must first obtain the written waiver of such pre-emptive right from all other stockholders of the corporation which could result in a long and tedious affair especially if there are numerous stockholders. Finally, no corporation shall increase or decrease its capital stock unless approved by a majority of the board of directors and, at a stockholders' meeting duly called for the purpose, two-thirds (2/3) of the outstanding capital stock shall favor the increase or diminution of the capital stock x x x." Accordingly, the Securities and Exchange Commission must also give its approval for the authorized capital stock to be increased.

As for retained earnings, Section 43 of the Corporation Code provide that "Stock corporations are prohibited from retaining surplus profits in excess of one hundred (100%) percent of their paid-in capital stock, except in: (1) when justified by definite corporate expansion projects or programs approved by the Board of Directors; or (2) when the corporation is prohibited under any loan agreement with any financial institution or creditor, whether local or foreign, from declaring dividends without its/his consent and such consent has not yet been secured; or (3) when it can be clearly shown that such retention is necessary under special circumstances obtaining in the corporation, such as when there is a need for a need for special reserve for probable contingencies." Therefore, unless any of the three above-mentioned exceptions are present, surplus profits only to the extent of one hundred (100%) percent of paid-in capital stock may be used for the financing needs of the corporation. Anything in excess must be declared as dividends.

(b) What are the main sources for borrowing for these types of corporates?

 

The main sources for borrowing for these types of corporates are:

(1) advances from shareholders and their family members; and

(2) borrowings from banks.

(3) issuance of commercial paper.

(c) Is there significant competition among lenders and significant choice of sources for borrowing available to these types of corporates?

 

Before the current economic turmoil bedeviled East Asia, banks were in significant competition to lend to corporates.

Corporates normally borrow directly from financial institutions which are largely dominated by commercial banks. Prior to the current crisis, commercial banks were a significant source of long-term finance, even as their primary activities have traditionally been to fund working capital requirements of the business sector, and to provide various money exchange and fiduciary services.

(d)What is the present average rate of interest payable in respect of unsecured and secured debt?

 

The present average interest rate for unsecured and secured debt is 18% and 20% respectively. Some blue-chip corporations can, however, borrow at a lower rate.

(e) Is finance generally available for long, medium and short-term borrowings?

 

Finance is generally available for long, medium and short term borrowing. At present however, the country is experiencing a credit crunch as banks are generally unwilling to lend. Hence, long term borrowing is a rarity while for short and medium term loans, interest rates are repriced every thirty days.

(a) What part does the central bank of this economy play in the regulation of the banking and finance sector? Would it intervene or seek to influence the outcome or course of events if, for example a large corporate with debt exposure to a number of banks was in financial difficulty?

 

There are a number of ways wherein the Bangko Sentral ng Pilipinas (the "BSP") regulates the banking and finance sector. For example, banks must maintain a certain level of reserve requirements with the BSP in connection with the level of outstanding loans that they have. Reports for loans considered to be as DOSRI (i.e., directors, officers, stockholders and related interest) loans must be given to the BSP and such must not be more than the prescribed level provided for by the Manual on Regulations for Banks. Since the onset of the economic crisis, the various banks which encountered severe financial difficulties were found to have DOSRI loans in excess of those permitted by existing BSP rules.

Generally, the BSP would not intervene or seek to influence the outcome or course of events if a large corporate with debt exposure to a number of banks was in financial difficulty. It would be different though if the large corporate is a bank or a financial institution falling under the jurisdiction of the BSP, in which case the BSP would take a direct hand in determining the outcome of events.

With the recent surge in filing for suspension of payments by corporates and a sharp increase in payment defaults by corporates, the BSP has tightened its rules for loan-loss provisions and accounting for bad loans.

(b) Is there any tradition in this economy for a 'main' or 'house' or 'lead' bank to become involved as a chief negotiator or leader in the case of the financial difficulty or insolvency of a large corporate borrower with debt exposure to a number of banks?

 

There is no such tradition in this country. What usually happens is that the banks meet amongst themselves and form a Creditors' Committee composed of different representatives from various banks to negotiate and deal with the large corporate borrower to protect the interests of all the banks involved. More often than not, the banks with the largest exposure to the large corporate borrower take the initiative in forming the Creditors' Committee and attempt to convince all banks to participate/cooperate with the Committee.

(a) Is assessment or analysis of lending risk widely practised in this economy?

 

Yes. Risk assessment or analysis of lending is widely practiced in this country.

Banks and other financial institutions devote much time evaluating the credit risk of potential borrowers and will generally charge an interest rate that corresponds to the perceived credit risk of the borrower. For corporates issuing commercial papers, a credit rating from credit rating agencies is required. The Credit Information Bureau, Inc., which was established in 1985, provides credit rating services in the country.

(b) If so, does the average lending bank make adequate assessment of risk analysis when contemplating lending to a corporate borrower?

 

An average lending bank now makes a thorough assessment of risk analysis when contemplating lending to a corporate borrower. Due to the regional currency crisis that is affecting the philippine, the number of loans becoming past due is increasing and bankers have assumed a "risk adverse" mentality. Thus, banks are more selective now in choosing who to give credit to as compared to recent years.

(c) Would it be usual or common for a lending bank to regularly monitor the financial performance of a corporate borrower?

 

Lending banks regularly monitor the financial performance of a corporate borrower. If the corporate pays the bank on time, monitoring is generally made only once a year. In case the corporate is experiencing certain financial difficulties affecting its capacity to pay the bank, then the monitoring of the corporate is done on a more frequent basis until the financial condition of the borrower has, so to speak, normalized.

Monitoring by the bank is also affected by the amount of the loan made available to the corporate and the relationship between the bank and the corporate.

(d) Would it be usual or common for a lending bank to be regularly supplied with copies of the financial statements of a corporate borrower?

 

It is a usual practice for banks to ask for a copy of a corporate borrower's financial statements before granting loans. However, unless such financial statements come from a reputable accounting firm, banks are wary of the accuracy of such financial statements as they might not be giving the true state of affairs of the corporate. Section 76 of Republic Act No. 337, otherwise known as "The General Banking Act", it provides as follows:

"SEC. 76. Before granting a loan, banks must exercise proper caution to ascertain that the debtor is capable in fulfilling his commitments to the Bank.

Towards this end, banks may demand of their credit applicants a statement of their property and of their income and expenditures. Should such statement prove to be false or incorrect in any material detail, the bank may terminate any loan granted on the basis of said statement and shall have the right to demand immediate repayment of the obligation."

Accordingly, banks in practice require the submission of the audited financial statements for their corporate debtors before approving any loan applications/renewals with them. The information contained in the audited financial statements form part of the due diligence checklist of banks.

A corporate also normally furnishes the bank with its annual audited financial statement. In case the corporate is experiencing certain financial difficulties, the bank invariably requires the corporate to furnish it with quarterly or semi-annual financial statements.

(a) Is there a significant source of foreign bank lending in this economy?

 

Yes. There is a significant source of foreign bank lending in this country.

Pursuant to Republic Act No. 7721 entitled "An Act Liberalizing the Entry and Scope of Operations of Foreign Banks in the philippine and For Other Purposes" the Bangko Sentral ng Pilipinas came out with Circular No 51, Series of 1994 providing the modes of entry of foreign banks in the philippine to wit:

"Section 2. Modes of Entry for Foreign Banks. With prior approval of the Monetary Board, foreign banks may operate in the philippine through any one of the following modes:

a) By acquiring, purchasing or owning up to sixty percent (60%) of the voting stock of an existing domestic bank (including banks under receivership or liquidation, provided no final court liquidation order has been issued);

b) By investing in up to sixty percent (60%) of the voting stock of a new banking subsidiary incorporated under the laws of the philippine; or

c) By establishing branches with full banking authority."

The following are the foreign banks that have entered the philippine through the above-mentioned modes:

a) Australia & New Zealand Banking Group Limited;

b) Bank of Tokyo Ltd;

c) Bangkok Bank Public Company, Limited;

d) Chase Manhattan Bank;

e) Deutsche Bank;

f) D B S Bank philippine, Inc.

g) Fuji Bank Limited;

h) International Commercial bank of China;

i) Korea Exchange Bank; and

j) ING Bank.

(b) If so, is it usual for this funding to be provided by the foreign bank/s alone or in combination with funding from local or domestic bank/s?

 

Foreign banks usually lend to corporates alone. But they do participate also with domestic banks in syndicated lending to corporates.

(c) Are you able to detect whether there are significant differences in approach and funding terms when a foreign bank is involved in the lending (as compared with a purely local or domestic funding)?

 

Yes. There are significant differences in approach and funding terms when a foreign bank is involved in the lending to corporates though many of the foreign banks in the country are however staffed by Filipinos who were previously working with domestic banks.

(d) If so, what are the main differences?

 

Prior to the currency crisis, corporates will generally have easier access to foreign currency denominated loans from foreign banks.

Foreign banks are much stricter in terms of documentation compared with domestic banks. This is especially so if the borrower is a Philippine corporation. For a subsidiary or branch of a large foreign corporation, foreign banks sometimes are less stringent with the documentation primarily due to existing relationships by the foreign bank's international branches with the parent foreign company or affiliates.

Foreign banks also rely more on the financials of domestic corporates compared with domestic banks, which sometimes lend on the basis of the name or relationship with the borrower.

(a) Is 'related' or 'exclusive' lending (ie where a corporate borrower and a bank have an established commercial relationship such that only that lender is looked to as the source of borrowing by the corporate borrower) common in this economy?

 

Large corporate borrowers generally have one or two banks with whom they have close relationships. It is not unusual, however, for such banks to syndicate the loan, especially if the loan involves a big amount. For some family controlled large corporates, extensive dealings with the family-controlled banks are normal occurrence.

The Manual of Regulations for Banks and Other Financial Intermediaries (the "Manual") provides for a single borrowers limit and this encourages the practice of spreading the loan among different banks . Another factor that discourages "related" or "exclusive" lending are the DOSRI prohibitions, which, as recent events have shown, are extensively violated by the controlling shareholder.

 

(b) If no, what effect does this have if the corporate borrower is in financial difficulty or is insolvent?

If the corporate borrower is heavily indebted to numerous banks and is experiencing financial difficulties, assuming that the loans of the corporate borrower are unsecured, then banks would be more receptive to a work out especially if the corporate borrower has sufficient assets to cover its labilities but is not liquid. However, if the assets are less than their liabilities banks are more inclined to start litigation proceedings against the corporate borrower to protect their interests.

If the debts are secured however, it is more likely that the banks would prefer to just foreclose on their security rather than filing for a collection case against the corporate borrower. If in the perception of the banks the business of the corporate borrower is still viable, they are likely to be receptive to the idea of a work-out in order to keep the business afloat until the crisis is over as they have a chance to get their loans paid complete with interest.

The above presumes that the lenders are in equal or more or less similar positions with respect to the security they are holding. If one or some banks are inferior in their security position as compared with the other lender banks, then the former might block the proposed rehabilitation plan/restructuring until they are assured of an equal or more or less similar security position.

(a) Is 'syndicated' lending (ie where a group of banks or financial institutions join together to provide funding for a corporate borrower) common in this economy?

 

Prior to the present crisis, syndicated lending for large borrowings was available as a source of credit for corporate borrowers. At present, there is a dearth of syndicated loan transactions taking place as the amount of the loans the banks are willing to extend are less in amounts.

(b) If so:

(i) does a lead bank perform the role of 'agent' on behalf of all the lenders; and/or

 

It is common for a bank to be appointed as an agent by the other banks for the purpose of negotiating the basic terms and conditions of the loan (i.e., interest rate, term, and security). Usually, this bank is appointed by the corporate borrower to transact with the other banks to arrange this syndicated loan.

(ii) is the concept of a 'trustee' (or similar) for a syndicate of banks (ie where the 'trustee' holds any security for the syndicated funding on trust for the syndicate of banks) known and/or practised in this economy?

 

Yes. The concept of a "trustee" for a syndicate of banks is known and widely practiced in this country. The Civil Code adopts the principles of the general law of trusts, insofar as they are not in conflict with Philippine laws.

The trustee is appointed to hold the security given for the loan. The parties to the syndicated loan usually execute a "Mortgage Trust Indenture" for this purpose. The trustee is given a fee in consideration for the services that he will render.

(iii) if the corporate borrower is in financial difficulty or is insolvent what function does the 'agent' or 'trustee' perform?

 

The functions of the agent and/or the trustee are normally set forth in the loan agreement. In a standard loan agreement with a trust indenture, the functions of a trustee is to hold the collateral being given as security for the loan of the various banks involved for such banks, to do all acts necessary to maintain and preserve making sure that the value of such collateral is in no manner diminished. Any proposed activity involving the collateral submitted shall require the consent of the trustee. Therefore, before the collateral may be sold, assigned, transferred, alienated, encumbered, leased or otherwise disposed of, the trustee must be informed and should have consented to such action, after taking into consideration the purpose of such collateral in the trust indenture.

(a) Is the concept known as 'debt subordination' (ie, a contractual arrangement between lenders in which there are 'layers' of 'senior' and 'junior' debt and which has the effect of postponing repayment of the 'junior' debt until payment has been made of the 'senior' debt) recognised and practised in this economy?

 

Debt subordination is recognized but is rarely practiced in the philippine. The advances from shareholders and obligations to affiliates are normally made the junior or subordinated debt.

(b) If so, is debt subordination recognised and/or enforced under the insolvency regime of this economy?

 

Yes. Debt subordination is recognized and/or enforced under the insolvency regime of the philippine.

(a) Is it permissible for banks to own equity in a corporate borrower?

 

Yes. It is permissible for banks to own equity in a corporate borrower. Section 1376 of the Manual provides that a bank with expanded commercial banking authority may invest in the equity of allied undertakings, financial or non-financial, as well as in the equity of enterprises engaged in non-allied activities subject to the limitations and conditions contained in the Manual.

A commercial bank on the other hand, may invest in the equity of allied undertakings, financial or non-financial.

There is nothing in Republic Act No. 337, otherwise known as the "General Banking Act" which prohibits the conversion of debt into equity. However, such conversion would be subject to the limitations and conditions contained in Sections 1376 to 1384.5 of the Manual.

(b) If so, is it permissible for a bank to convert debt to equity?

 

Yes. It is permissible for a bank to convert debt to equity subject to the limitations and conditions contained in Sections 1376 to 1384.5 of the Manual.

(c) Are there instances where this has in fact occurred, particularly in the context of either:

(i) in the context of an 'informal work out' as a result of the insolvency or approaching insolvency of a corporate borrower; or

 

Yes. The conversion of debt into equity has occurred in the context of an "informal work out" as result of the insolvency or approaching insolvency of a corporate borrower. This option is, however, seldom, if at all, resorted to by banks.

(ii) in the context of a formal insolvency administration of a corporate borrower?

 

No. To the best of our knowledge, the conversion of debt into equity has never occurred in the context of a formal insolvency administration of a corporate borrower.

(d) In such a case, is it usual for the bank to be then represented on the management or board of the corporate borrower?

 

Yes. It is usual for the bank to be represented on the management of board or the corporate borrower in the event of the conversion of debt to equity. In fact, even if there is no such conversion, some banks require - and the borrower has no choice but to agree - that they be given the right to be represented in the board of the borrower. The Manual in Sections 1378.1, 1378.2, 1379.1, and 1380.2 provides for the limitation in the amount of the voting stock of the corporation in which banks may own equity in to avoid excessive control by such banks.

 

[This aspect is raised later in this working guide, so only general answers are required here]

(a) Is there a market for 'debt trading' (ie, where a bank might sell or trade the debt owed to it by a corporate borrower) in this economy?

 

No. There is generally no market for debt trading in the philippine, except for bonds which are publicly issued and for which appropriate regulatory approvals and permits are obtained. At present, the more widely used type of long-term debt security is the long-term commercial paper. With respect to short-term debt, it is not traded unless similar appropriate regulatory approvals and permits are obtained.

(b) If so, is debt trading common in this economy, particularly where the corporate borrower is insolvent or near insolvent?

 

No. Debt trading id not common in this country, particularly so where the corporate borrower is insolvent or near insolvent

(a) Is the concept of a third party 'guarantee' (as distinct from a security over property) to support corporate borrowing known and practised in this economy?

 

Where risks are present, it is common for banks to require principal stockholders and most, if not all, directors to be jointly and severally liable with the corporate debtor. In this sense, the principal stockholders and directors are now called sureties rather than guarantors because the benefit of excussion is not enjoyed by the principal stockholder and/or director.

(b) Is there a law which regulates the power to take or give a guarantee?

 

Yes. The Civil Code provides for the rules governing guaranty and suretyship.

(c) Is it common or usual for corporate borrowing to be supported by guarantee/s?

 

As stated in (B10)(a) infra, corporate borrowings are usually supported by a joint and several guaranty (suretyship agreement) by the principal shareholders and most, if not all, of the directors.

(d) If so, are these guarantees usually taken from owners/directors of the corporate borrower; from other corporates associated with the corporate borrower (eg subsidiaries or holding company); or from unrelated third parties?

 

The joint and several guaranty (suretyship agreement) are usually from the majority stockholders of the corporate borrower, whether they be individuals or subsidiary corporations. Unrelated third parties do not normally execute such a joint and several guaranty.

(e) Is there a law which regulates the enforcement of guarantees?

 

The Civil Code regulates the enforcement of the joint and several guaranty (suretyship agreement). In case it is executed by a corporation, a defense usually raised once the joint and several guaranty is enforced against it, is to contend that the same was ultra vires and, thus, may not be enforced against the corporation.

(f) Is it easy or difficult in practice to enforce guarantee obligations?

 

Unless the obligation is secured, the enforcement of an obligation is difficult as the court proceedings can take many years before the judgment may be considered final.

(g) Is it usual to require that a guarantor should give security over the property of the guarantor as an additional comfort to the lender?

 

No. It is not usual to require the person executing the joint and several guaranty to give security over his property as an additional comfort to the lender. Reliance is placed upon the personal obligations of the sureties.

(h) Does the insolvency of a corporate borrower have any effect on the enforcement of a guarantee?

 

The insolvency or even the imminent danger of insolvency of the corporate borrower has an effect on a simple guarantee. First the insolvency of the corporate borrower will deprive the guarantor of the benefit of excursion. This means that the creditor does not have to exhaust all the property of the corporate borrower before proceeding against the guarantor.

B5. Exclusive Lending

Section 1301 of the Manual of Regulations for Banks and Other Financial Intermediaries (the "Manual") provides for the rules on the loan limit to a single borrower to wit:

"SECTION 1301 Loan Limit to a Single Borrower. Except as the Monetary Board may otherwise prescribe, the total liabilities of any person, company, corporation or firm, to a commercial banking corporation for money borrowed, excluding (a) loans secured by obligations of the BSP or of the Philippine government; (b) loans fully guaranteed by the government as to the payment of principal and interest; (c) loans to the extent covered by hold-out on or assignment of, deposits maintained in the lending bank and held in the philippine; (d) loans and acceptances under letters of credit to the extent covered by margin deposits; and (e) other loans or credits which the Monetary Board may, from time to time specify as non-risk assets, shall at no time exceed fifteen percent (15%) of the unimpaired capital and surplus of the bank.

The total liabilities of any borrower may amount to a further fifteen percent (15%) of the unimpaired capital and surplus of such banking corporation provided the additional liabilities are adequately secured by shipping documents, warehouse receipts or other similar documents transferring or securing title covering readily marketable, non-perishable staples, which staples must be fully covered by insurance, and must have a market value to at least one hundred twenty five percent (125%) of such additional liabilities.

Loan accommodations granted by commercial banks to any other bank, as well as deposits maintained by them in any bank licensed to do business in the philippine, shall be subject to the loan limit to any single borrower as herein prescribed.

Funds of rural bank, except those representing proceeds of Special Time Deposits (STDs) and rediscounting, deposited with any other bank shall at no time exceed an amount equivalent to fifteen percent (15%) of the unimpaired capital and surplus of the rural bank: Provided, That with prior clearance from the Director, SES Department III, a rural bank may exceed the limit herein prescribed if there is only one depository bank in the locality where the rural bank is situated."

Some distinctions between suretyship and guaranty are: (a) a surety assumes liability as a regular party to the undertaking while the liability of a guarantor depends upon an independent agreement to pay the obligation if the primary debtor fails to do so; (b) a surety is charged as an original promisor, while the engagement of the guarantor is a collateral undertaking; and finally, the guarantor is secondarily liable, while a surety is primarily liable.