The loan letter

The Board of Development Bank of the Philippines (DBP) in October last year received a report from the bank COO, Eduardo Garcia, detailing the P5.4 billion in loan write-offs of the bank from 2004 to 2009.

From what I gathered, DBP president and CEO Francisco del Rosario Jr. asked for the detailed report, showing the companies that benefited from the DBP write-offs, including the exact amount of the loans.

So far the DBP board has no action related to the report.

It showed that 17 companies accounted for almost half of the P5.4 billion write-offs. Among them were well-known companies in the Lopez group, such as Bayan Telecoms (P591 million), Maynilad Water (P710 million) and Benpres Holdings (P157 million).

We received a letter from Salvador Tirona, president of Lopez Holdings Corp., which used to be Benpres Holdings, saying that our piece on November 7 (entitled “The loan arranger”) “may have misled your readers into thinking that the Lopez Group received special favors from the DBP.”

Following is the rest of it:

“Contrary to your impression that our companies enjoyed loan write-off bonanza,” there was nothing enjoyable about debt restructuring negotiations and court-assisted financial rehabilitation that our companies underwent in order to resolve the various issues with creditors.

“Lopez Holdings Corp. and its member companies invested heavily to provide basic infrastructure and services such as water distribution, telecom and cable to our fellow Filipinos. Our debt went into real businesses intended to support the country’s development in the context of deregulation and privatization. It is unfortunate that our businesses suffered economic losses partly due to the Asian financial crisis of 1997 but mainly due to the hostile regulatory regime prevailing at that time. Nonetheless, we treated our creditors fairly as we took the greatest share of the pain. Recall that Maynilad and Bayan’s debt issues were resolved by the mandate of separate rehabilitation courts.

“For Lopez Holdings, it has been paying goodwill interest semi-annually without interruption since its 2002 standstill, despite its inability to pay for the principal amounts that fell due. DBP, as on original holder of Lopez Holdings long-term commercial papers, was part of the list of creditors regularly receiving goodwill interest until April 2008. In August 2011, Lopez Holdings conducted a tender offer for its remaining unrestructured debt at 100 percent of the principal amount. At the time of the tender offer, DBP was no longer a creditor of the Lopez Holdings.

“You can appreciate that although DBP and our other creditors may have already written off our debt, their successor lenders (SPV or not) continue to collect interest and principal payments under terms consensually agreed upon or as ordered by the courts. Needless to say, DBP would have recouped its write-offs substantially had it waited a little more time. For some reason, the bank’s old management found it in their favor to cut all ties with our group of companies as quickly as possible under the previous administration.

“Let me assure you that there was nothing irregular, arbitrary or special about the loans granted to our group. They were transacted on arms-length basis, following rigorous credit review procedures. We borrowed from various local and international banks and each lender, including DBP, had every opportunity to decline our loan application if they found it not credit worthy.

“Proceeds of the loans were invested in legitimate businesses, providing real infrastructure for the development of the nation and not for speculation. Lopez Holdings did not use its loans to gamble in the stock market, unlike certain loans being investigated in the Senate which were reported to have been granted arbitrarily or as special accommodations. There is absolutely no comparison between such speculative loans and the loans provided in the regular course of business intended for the country’s development.

“When our investment failed, all parties shared the pain, not just creditors. Lopez Holdings itself wrote off P20.7 billion in equity and investments for Maynilad and Bayan Telecommunications alone. This does not include the cost of interest on loans.

It has been over a decade since these loans were granted to our group of companies (1996-2000). Isn’t it curious that these issues are being surfaced just when the Senate is investigating DBP for loans it granted to parties under allegedly questionable circumstances? Was this a diversionary tactic for which we are hit as collateral damage?”

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Based on the report to the DBP board, the write-off happened in 2006, as part of the bank’s efforts to clean up its loan portfolio through the SPV law, or the Special Purpose Vehicle law.

Still, nobody outside DBP knew about the write-offs, until Del Rosario asked the chief operating officer, the COO, for the report.

Recently, copies of the report made their way to banking circles, and thus to media outfits, including the Inquirer and, from what I gathered, even other national dailies like the Philippine Star.

What explains the sudden interest in the report? The president of Lopez Holdings asked if it was a “diversionary tactic,” perhaps employed by the camp of businessman Roberto Ongpin, whose transaction with DBP was under Senate investigation.

A PR diversionary tactic it could very be. Still, those multibillion peso write-offs of loans of a big conglomerate like the Lopez group were never revealed to the public when they were made by DBP. The last time I checked, this government bank still gets its capital from our taxes.

Both the bank and the Lopez group said nothing about the write-offs at that time.