The Bangko Sentral ng Pilipinas has approved the plan of Aboitiz-led Union Bank of the Philippines to raise up to P20 billion from a new offering of debt notes qualifying as tier 2 or supplementary capital.
Part of the proceeds, amounting to P7.2 billion, will be used to preterminate older tier 2 notes, UnionBank said in a disclosure to the Philippine Stock Exchange.
The new issue will be issued a few days after the call date of the old tier 2 notes, UnionBank chief financial officer Jose Emmanuel Hilado said in a text message on Friday.
Subject to regulatory conditions, the BSP has also approved UnionBank’s plan to exercise this option to pre-terminate its existing P7.2-billion tier 2 capital notes due 2025.
The older tier 2 notes, issued in 2015, are also compliant with the Basel 3 framework. Nonetheless, Hilado said UnionBank would like to redeem these older notes because, by nature, this type of securities “decays” after exceeding five years.
This “decay” means that the time value of the option declines as the expiration date gets closer because there’s less time for an investor to earn a profit from the option.
Almost all banks redeem tier 2 notes after five years or otherwise risk causing reputational issues, even if interest rates are in the favor of issuer-banks, Hilado noted.
Implemented by the BSP in 2014, Basel 3 global standard for capital adequacy introduced a complex package of reforms designed to improve the ability of bank capital to absorb losses. It also extended the coverage of financial risks and put in place stronger firewalls against periods of stress.
Tier 2 capital is the secondary layer of a bank’s capital held as required reserves. It is comprised of revaluation reserves, general provisions, subordinated term debt, and hybrid capital instruments.
In the first 10 months of 2019, UnionBank chalked up a net profit of P11 billion, up by 67 percent year-on-year. —Doris Dumlao-Abadilla