BDO to redeem P10-B tier 2 notes

MANILA, Philippines—Banco de Oro Unibank is set to redeem by end-May this year P10 billion worth of debt notes qualifying as tier 2 capital.

By exercising its call option on the tier 2 notes this year, the banking arm of tycoon Henry Sy avoids paying a steeper interest servicing if it were to wait for the 2018 maturity of these notes. This is especially since BDO, which raised $1-billion in fresh core or tier 1 capital from a stock rights offering last year, is seen in a very good position to retire these tier 2 notes.

In a disclosure to the Philippine Stock Exchange on Thursday, BDO said it would exercise its option to redeem the P10 billion tier 2 notes. The notes will be redeemed from investors for cash at a redemption price equal to the face value plus accrued interest covering the accrued and unpaid interest as of but excluding May 31 this year.

The notes, which were issued in 2008, bear an interest of 8.5 percent per annum for the first five years but the rate will increase after the fifth year unless redeemed by the bank. This step-up feature makes it costly for the bank not to redeem the 10-year notes at the fifth year (2013), which thus becomes a “synthetic” maturity.

When BDO completed last year a $1-billion stock rights offering, this capital-building made it not only the largest bank not only in terms of assets but also the biggest in terms of capital base. At end-2012, BDO’s total equity jumped by 62 percent to P157.3 billion on account of the stock rights issuance as well as the bank’s profitable operations.

BDO’s net profit grew by 36 percent to P14.3 billion last year, exceeding its profit guidance of P12.5 billion as trading gains also added to the 7 percent growth in net interest income. Return on equity stood at 11.5 percent.

Total resources climbed by 13 percent to P1.2 trillion last year as gross customer loans and investment securities expanded by 15 percent and 26 percent, respectively. The asset growth was funded by a 9 percent increase in total deposits and the P43.1 billion proceeds from the July 2012 rights offering.

By boosting its core capital, the bank built a comfortable buffer to the more stringent Basel 3 capital requirements to be implemented by the BSP by January 2014.

Basel 3 introduces a complex package of reforms designed to improve the ability of banks to absorb losses, extend the coverage of financial risks and have stronger firewalls against periods of stress.