New lease on life of Udenna

For now, Davao-based businessman Dennis Uy, a major contributor to the election campaign of former President Rodrigo Duterte and whose businesses grew exponentially during the latter’s term, can rest easy that his holding company, Udenna Corp., will remain under his control.

Recall that BDO Unibank, Inc. earlier sent Udenna a Notice of Declaration of Default (which is akin to a foreclosure notice) in connection with the failure of its subsidiary, Global Gateway Development Corp. (GGDC), to pay lease rentals to Clark International Airport Corp. (CIAC) on the facilities it is building at Clark Freeport Zone.

CIAC considered GGDC’s inability to pay the rentals as an event of default under their lease agreement.

In light of CIAC’s action, BDO, as majority lender of a syndicate of banks that extended billion-peso loans to Udenna, demanded that it immediately enter into discussions for an orderly resolution of the issue.

With Udenna’s settlement of the rental issue with CIAC, which is the root of BDO’s notice of default, Udenna has been restored to good credit standing with BDO and the banks it represents.

Even with the settlement, however, Udenna said the rental issue with CIAC does not constitute an event of default that would justify the notices of default sent by CIAC and BDO.

Uy has found himself in an unfamiliar situation on this issue. With the end of the Duterte administration, he no longer has the political connections or influence that had made it easy for his companies to secure credit facilities from domestic banks.

In a manner of speaking, Udenna had been forced to quickly settle things with CIAC, otherwise BDO’s notice of default would have come to effect after the deadline.

It would have been difficult, if not futile, for Udenna to seek assistance from the government or any government-owned banks to bail it out of its predicament.

In light of the heavy national debt and given the no-nonsense character of Finance Secretary Benjamin Diokno on fiscal matters, it is doubtful if that idea would even get to first base with him.

BDO also dodged a bullet, so to speak, with Udenna’s prompt settlement with CIAC. If that did not happen, BDO would have, as a matter of sound corporate governance and in compliance with banking regulations, been compelled to either waive the effects of its default notice or call in Udenna’s loans.

From past experiences, that waiver is usually given by creditors if, in their judgment, the debtor is in a position to meet its loan covenants despite the event of default, or that declaring a debtor in default could be messy because taking over its assets may require engaging the services of third parties for their preservation and disposition.

But there is a moral hazard in the waiver of the default provision. That could be a precedent for debtors who may find themselves in a financial fix in the future and, as a result, become less diligent in complying with the loan covenants in expectation that they would get a similar treatment.

If at all, BDO’s enforcement of its notice of default would have triggered the application of the cross default provision in Udenna’s other loan agreements, meaning, those agreements shall be considered similarly breached on account of the occurrence of an event of default.

Whether or not that breach would be automatic or subject to compliance to certain procedures or protocols depends on the terms of the loan agreement.

In a loan default situation, the creditors can, depending on the terms of the agreement, seize the properties that have been mortgaged, garnish the debtor’s bank accounts and take over the operation of the business.

Worse, the company and its key managers would suffer irreparable reputational damage that may haunt them in their dealings with banks, or even their colleagues, in the future.

Had Udenna failed to come to terms with CIAC, the only way for it to avoid the adverse effects of BDO’s default notice and still continue to operate is to seek relief under the Financial Rehabilitation and Insolvency Act of 2010 (or Republic Act No. 10142).

The law provides an orderly procedure for the rehabilitation (if still feasible) and liquidation (if closure becomes inevitable) of businesses that run into serious financial trouble.

The ways things appear to be going in Udenna, the recent incident with CIAC and BDO may not be the last. INQ

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