Following the adoption in the Philippines effective July 1, 2001 of the risk-based capital adequacy framework for banks to comply with the provisions of the General Banking Law of 2000, the Monetary Board of the Bangko Sentral ng Pilipinas, in its Resolution No. 150 dated January 30, 2003, approved the guidelines for the issuance of unsecured subordinated debt (USD) by locally-incorporated banks. The USD shall be eligible as Tier 2 (supplementary capital) for purposes of computing the capital adequacy ratio of banks.
Under the guidelines, USD may only be issued upon prior approval of the BSP and upon compliance with the following pre-qualification requirements: the issuer must comply with the minimum capital required under existing regulations; it must have established a risk management system appropriate to its operations, and it must have a quasi-banking authority if it is not a universal bank or a commercial bank and it intends to issue USD to more than nineteen (19) investors.
The overseas issuance of USD shall also be subject to the same guidelines. Therefore, no overseas issuance of USD by domestic banks shall be allowed if the law, rules and regulations of the country where said USD will be issued are inconsistent with the provisions of these guidelines.
The issuance may either be Public or Private. For investor protection, Public issuance requires the participation of an underwriter, USD Registry, Selling Agent, Market Maker and if the USD will also be offered to the general public, the issuer must be rated by an independent rating agency and a public trustee must be appointed. Private issuance may be done without participation of those parties but the issuing bank is responsible for information disclosure, determining sustainability of investor and maintenance of USD Registry.
A private issuance is further classified into negotiated and qualified issuance. Negotiated issuance refers to issuance to nineteen (19) or less investors, whether institutional or individuals where resale or negotiation is not allowed. On the other hand, a qualified issuance refers to issuance to unlimited institutional investors where resale or negotiation is allowed but only to another institutional investor.
The USD that will be distributed publicly may either be scripless in form or evidenced by certificates of indebtedness. All USDs must have minimum denomination of 500,000 with minimum maturity of 10 years for upper Tier 2 capital and 5 years for lower Tier 2 capital. USD that will be issued privately or on a negotiated basis must be evidenced by appropriate certificates. To ensure transparency, the following provisions must appear in bolder prints, in the face of every note, debenture or certificate:
- This obligation is not a deposit and is not insured by the Philippine Deposit Insurance Corporation (PDIC); and,
- This obligation is subordinated to the claims of depositors and ordinary creditors, is unsecured, not covered by the guaranty of (name of bank) or its subsidiaries or affiliates, and is ineligible as collateral for a loan granted by said bank and its subsidiaries or affiliates.
If the USD is scripless in form, the foregoing provisions/information shall be furnished to every buyer/investor in a separate written instrument receipt of which must be duly acknowledged by him.
The issuance of the guidelines is expected to provide banks with more accessible and possibly less expensive capital. It can also greatly help in the development of the domestic capital markets.