Notes to Financial Statements - BDO

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Notes to Financial StatementsDECEMBER 31, 2008, 2007 AND 2006(Amounts in Millions Except Per Share Data)Senior NotesOn November 23, 2004, the Board of Directors approved the issuance of senior bonds. Relative to this, on February 18, 2005 the Parent Bankissued US$100 million, 6.5% senior notes due in 2008 (the “Senior Note”). The issuance of the bonds under the terms approved by the Boardof Directors was approved by the BSP on January 31, 2005. Among the significant terms and conditions of the issuance of the senior notesare:(a) Issue price at 99.3% of the principal amount;(b) The senior notes bear interest at the rate of 6.5% per annum from and including February 18, 2005 to but excluding February 19, 2008.Interest will be payable semi-annually in arrears on February 19 and August 19 of each year, commencing August 19, 2005, except thatthe first payment of interest will be in respect of the period from and including February 18, 2005 but excluding August 19, 2005;(c) The senior notes will constitute direct, senior, unconditional, and unsecured obligations of the Bank and claims in respect of the notesshall at all times rank pari passu and without any preference among themselves. The payment obligations of the Bank under the seniornotes shall at all times rank at least equally with all other present and future unsecured and unsubordinated obligations of the ParentBank, including liabilities in respect of deposits;(d) The Bank may redeem the senior notes in whole but not in part at redemption price equal to 100% of the principal amount of the SeniorNotes together with accrued and unpaid interest to the date fixed for redemption upon the occurrence of certain changes affectingtaxation in the Philippines, as more particularly specified in the covering offering circular; and,(e) The 2008 senior notes are not guaranteed or insured by the PDIC and are not deposit liabilities of the Parent Bank.On February 15, 2008, the Group settled in full the outstanding senior notes amounting to P4,174, inclusive of accrued interest of P119.On October 16, 2003, the Group listed 6.5% US$150 senior notes in the Singapore Stock Exchange with maturity on October 16, 2008. Thenet proceeds from the issuance of the senior notes amounted to US$147 or about P8,890. Interest expense incurred by the Group on thesesenior notes amounted to P290 in 2008, P637 in 2007 and P478 in 2006 (shown as part of Interest Expense on Bills Payable and Others underInterest Expense account in the income statement). On October 16, 2006, $36 worth of senior notes was redeemed by various noteholders.The Group settled in full the outstanding senior notes of P5,536 on October 15, 2008 inclusive of accrued interest of P160.SMPHI (Preferred Shares)As required under PAS 32, Financial Instruments: Disclosures and Presentation, the Group recognized as financial liability 25,000,000 sharesof redeemable, cumulative and non-participating preferred shares with a par value of P10 per share issued to SMPHI on October 18, 2004.The preferred shares were issued at US$2 per share or an aggregate subscription price of US$50. The preferred shares entitle SMPHI tocumulative dividends, payable in US dollars semi-annually in arrears, equal to 6.5% of the issue price per annum. The Group is also requiredto redeem the preferred shares from SMPHI at the original issue price five years from the date of issue. As required by BSP, the Bank set upa sinking fund on October 17, 2005 for the redemption of the preferred shares. The balance of the sinking fund as of December 31, 2008and 2007 amounted to P2,110 and P1,357, respectively, and is invested in debt securities, shown as part of HTM investments (see Note 9.3).Dividends in arrears (recognized as interest expense) as of December 31, 2008 and 2007 amounted to P31 and P94, respectively, computedusing the exchange rate at year end and are presented as part of Bills Payable account in the statements of condition.17. SUBORDINATED NOTES PAYABLEThe components of this account are shown below:GroupParent Bank2008 2007 2008 2007Unsecured subordinated notes– P20 billion P 20,146 P 10,074 P 20,146 P 10,074Unsecured subordinated notes– US$200 million - 8,557 - 8,557P 20,146 P 18,631 P 20,146 P 18,631Total interest expense on subordinated notes payable amounted to P1,687 and P971 and P277 in 2008, 2007 and 2006, respectively, both inthe Group and Parent Bank financial statements (see Note 21).P20 Billion Unsecured Subordinated NotesOn November 21, 2007, the Group issued P10 billion unsecured subordinated notes eligible as Lower Tier 2 Capital due on 2017, callable withstep-up in 2012 (the “notes”) pursuant to the authority granted by the BSP to the Group on October 8, 2007 and BSP Circular No. 280 Seriesof 2001, as amended. The issuance was approved by the Board of Directors, in its special meeting held on June 1, 2007.60Thinking Ahead To Get You Ahead • Annual Report 2008
Notes to Financial StatementsDECEMBER 31, 2008, 2007 AND 2006(Amounts in Millions Except Per Share Data)On May 20, 2008, the Group issued another tranche of P10 billion unsecured subordinated notes eligible as Lower Tier 2 Capital due on 2018,callable with step-up in 2013 pursuant to the authority granted by the BSP to the Group on April 3, 2008 and BSP Circular No. 280 Series of2001, as amended. This issuance was approved by the Board of Directors, in its special meeting held on February 23, 2008.The Notes represent direct, unconditional unsecured and subordinated peso-denominated obligations of the Group, issued in accordancewith the Terms and Conditions under the Master Note. The Notes, like other subordinated indebtedness of the Group, are subordinated to theclaims of depositors and ordinary creditors, are not a deposit, and are not guaranteed nor insured by the Group or any party related to theGroup, such as its subsidiaries and affiliates, or the PDIC, or any other person. The Notes shall not be used as collateral for any loan made bythe Group or any of its subsidiaries or affiliates. The Notes carry interest rates based on prevailing market rates, with a step-up provision ifnot called on the fifth year from issue date. The Group has the option to call the Notes on the fifth year, subject to prior notice to Noteholders.The Notes will be used further to expand BDO Unibank’s consumer loan portfolio and to refinance its existing issue of Lower Tier 2 debt. TheNotes will also increase and strengthen BDO Unibank’s capital base, in anticipation of continued growth in the coming years.As of December 31, 2008, the outstanding balance of the Notes amounted to P20,146.US$200 Million Unsecured Subordinated NotesOn October 15, 2002, the Board of Directors of former EPCIB approved the raising of Lower Tier 2 capital through the issuance in theinternational capital market of subordinated bonds maturing in ten years but with a call option exercisable after five years subject to theprovisions of BSP Circular No. 280. The bonds bear a coupon rate of 9.4% per annum with provision for step-up after five years.The issuance of the foregoing subordinated notes under the terms approved by the Board of Directors was approved by the BSP under MBResolution No. 1660 dated November 12, 2002, as amended by MB Resolution No. 753 dated May 29, 2003.Relative to this, on May 16, 2003 and June 5, 2003, the former EPCIB issued US$130 million and US$70 million, respectively, 9.4% subordinatednotes due 2013. Among the significant terms and conditions of the issuance of the subordinated notes are:(a) Issue price at 98.7% and 101.5% of their principal amount;(b) The subordinated notes bear interest at the rate of 9.4% per annum from and including May 23, 2003 to but excluding July 1, 2008.Unless the call option is exercised, the interest rate from and including July 1, 2008 to but excluding July 1, 2013 will be reset at theUS Treasury rate plus 10.8% per annum. Interest will be payable semi-annually in arrears on January 1 and July 1 of each year,commencing July 1, 2003;(c) The subordinated notes will constitute direct, unconditional, unsecured and subordinated obligations of the Parent Bank and will at alltimes rank pari passu and without any preference among themselves but in priority to the rights and claims of holders of all classes ofequity securities of the Parent Bank including holders of preference shares (if any);(d) The Group may redeem the subordinated notes in whole but not in part at redemption price equal to 100% of the principal amountof the subordinated notes together with accrued and unpaid interest on July 1, 2008, subject to the prior consent of the BSP and thecompliance by the Group with the prevailing requirements for the granting by the BSP of its consent thereof;(e) Each noteholder by accepting a 2013 subordinated note will irrevocably agree and acknowledge that: (i) it may not exercise or claimany right of set-off in respect of any amount owed to it by the Group arising under or in connection with the subordinated notes; and,(ii) it shall, to the fullest extent permitted by applicable law, waive and be deemed to have waived all such rights of set-off; and,(f) The subordinated notes are not deposits of the Group and are not guaranteed or insured by the Group or any party related to theGroup or the PDIC and they may not be used as collateral for any loan made by the Group or any of its subsidiaries or affiliates. Also,the subordinated notes may not be redeemed at the option of the noteholders.On June 30, 2008, the Group settled the outstanding balance of the notes amounting to P9,160, inclusive of interest expense of P410.International Finance Corporation (IFC)On June 27, 2002, the Group entered into a US$20 convertible loan agreement with IFC. IFC has the option to convert a portion of theloan into common shares of the Group commencing two years after the date of the agreement for P16.70 per share. Total proceeds of theloan amounted to P1,112. In compliance with PAS 32, Financial Instruments: Disclosure and Presentation and PAS 39, Financial Instruments:Recognition and Measurement, the Group separated the equity component of the conversion option and unsecured loan with IFC. The loanbears interest at a rate of 5.4% per annum and will mature in 2008.Upon approval by the Board of Directors on February 11, 2005, the Group converted US$10 convertible loan from IFC, qualified as Tier 2capital, and issued 31,403,592 common shares of the Group based on the conversion price of P16.70 per share and exchange rate of P52.44to a dollar. The BSP subsequently approved the conversion on May 3, 2005.On April 18, 2007, the Group received notice of exercise from IFC to convert the remaining US$10 of its convertible loan to BDO Unibank,which conversion the BSP approved in a letter to the Group dated July 17, 2007. Subsequently, the Board of Directors, in its special meetingdated July 26, 2007, approved the conversion of the remaining US$10 of the convertible loan from IFC, qualified as Tier 2 capital. Thereafter,on August 23, 2007, the Group issued to IFC 31,403,592 common shares based on the pre-agreed conversion price of P16.70 per share andexchange rate of P52.44 to a dollar.Thinking Ahead To Get You Ahead • Annual Report 2008 61
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Notes to Financial Statements - BDO

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