SECURITY Bank Corp. has obtained approval of the Bangko Sentral ng Pilipinas to retire ahead of maturity P3 billion worth of debt notes that qualified as tier 2 or supplementary capital under expiring regulations.
In a disclosure to the Philippine Stock Exchange Tuesday, Security Bank said it had received imprimatur from banking regulator to exercise its call option on the tier 2 subordinated notes issued in December 2008 and would mature in 2018.
The redemption allows the bank to avoid the increase in interest rates under the “step-up” terms of the notes if these were not redeemed on the fifth year.
The tier 2 notes were issued in 2008 at a coupon rate of 8.625 percent per year. Unless the notes are redeemed, the interest rate beyond the fifth year will be reset higher at the equivalent of the five-year Money Market Association of the Philippines (MART1) Fixed Treasury Note (FXTN) (as of the first day of the eleventh interest period) multiplied by 80 percent plus a spread of 3.176 percent per year.
The call option on the fifth year is thus a synthetic maturity for the tier 2 notes, which will no longer be acceptable as capital compliance under Basel 3 capital adequacy ratio framework.
Universal and commercial banks are required by the BSP to adopt by Jan. 1, 2014, the capital adequacy standards under Basel 3, which 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.
In the meantime, Security Bank is issuing voting preferred shares in early 2014 to gain headroom vis-a-vis the existing foreign equity ceiling. It plans to sell the voting preferred shares to holders of its common stock through a one-for-one rights offering after the distribution of the 20 percent stock dividend this year.