Program for the Conversion of Philippine External Debt into Equity Investments

August 4, 1986 CBP CIRCULAR NO. 1111-86 PROGRAM FOR THE CONVERSION OF PHILIPPINE EXTERNAL DEBT INTO EQUITY INVESTMENTS In accordance with Monetary Board Resolution No. 592 dated July 18, 1986, this Circular contains guidelines relating to the Philippine Government's program for the conversion of external debt into equity investments in Philippine enterprises (the "Program"). Capitalized terms used in this Circular have the meanings given to such terms in Section 31 hereof. Inquiries and other communications regarding this Circular or the Program should be directed to the Debt Restructuring Office, Central Bank of the Philippines, Room No. 309, Five-Storey Building, Roxas Boulevard, Malate, Manila. LLphil It is anticipated that the Central Bank will from time to time issue revised versions of the Schedules attached hereto, and copies of the most recent revisions of these Schedules will be available upon request from the Debt Restructuring Office. Parties who contemplate entering into a Conversion Transaction under this Program are advised to obtain from the Debt Restructuring Office copies of the most recent revisions of the Schedules appropriate to the proposed transaction before finalizing any negotiations with respect to the transaction. CHAPTER I Policy Objectives ; Background SECTION 1. Objectives . The Program is designed to achieve principally the following policy objectives (1) to stimulate long-term equity investments in Philippine enterprises by both foreign investors and Filipinos; (2) to encourage the repatriation to the Philippines of foreign currency holdings of Philippine residents held abroad for the purpose of capitalizing equity investments in this country; (3) to provide additional incentives for investment in designated sectors of the Philippine economy that require prompt revitalization; and (4) to reduce the external debt burden of the Philippines. SECTION 2. Background to the Program . It has come to the attention of the Philippine Government that Philippine external debt obligations owed to commercial banks of financial institutions are being traded in the secondary market. If an investor purchases an interest in such an obligation and the obligor is able to redeem the debt for the Peso equivalent of the face amount of the obligation, this permits the investor to obtain Pesos. It is the intention of the Government to utilize the opportunity presented by this type of transaction in order to encourage investors (both Philippine and non-Philippine) to make long-term equity investments in Philippine enterprises. An important ancillary benefit for the Philippines resulting from the discharge of foreign currency denominated debt through the payment of Pesos, is a reduction in the aggregate external debt stock of the country. Such reductions alleviate the demands placed of the country's foreign exchange reserves by the need to make current debt service payments on existing foreign currency indebtedness. It should be noted in this regard that each Restructuring Agreement signed by a Philippine Public Sector Borrower implementing the Philippine Restructuring Principles released in November 1984 contains, in Section 5.11 thereof, a provision that permits (with the consent of the Central Bank and the Republic of the Philippines) the discharge of any credit covered by a Restructuring Agreement through the payment of an equivalent amount of Pesos. External debt obligations of a Philippine Private Sector Borrower may be redeemed for Pesos for conversion into equity investments if such borrower is permitted by its loan agreements to discharge its external debt obligations in Pesos, or the creditor otherwise consents to this arrangement. LLphil SECTION 3. Periodic Revisions . The program outlined in this Circular is designed to permit transactions of the kind described above in order to capitalize investments in a wide range of Philippine enterprises. Special incentives are incorporated into the program, however, for investments in areas of the Philippine economy that the Government believes require an immediate revitalization, or in which an increased level of investment is generally desirable. It is the intention of the Government that this Program be administered in a flexible manner in order to achieve the goals summarized above. To this end, it is anticipated that the guidelines contained in this Circular will be revised and updated from time to time through supplements to this Circular, or through revisions of the Schedules attached hereto. Any such supplement or revisions shall become effective only with respect to applications for Conversion Transactions received after the date on which the supplement or revision is made public. CHAPTER II Convertible Debt SECTION 4. Debt Eligible for Conversion . The categories of Philippine external debt that may be redeemed in connection with a Conversion Transaction are set out in Schedule 1 to this Circular. CHAPTER III Eligible Investors SECTION 5. Investors . Any person (natural or juridical) may act as an investor in connection with a Conversion Transaction without regard to the place in which such person is resident, domiciled or has its principal place of business or, in the case of a juridical person, the jurisdiction in which such person is incorporated or organized. Groups of investors may act through a nominee or agent in filing applications for approval of a Conversion Transaction, but investors are reminded that the investor in whose name the investment is registered at the time of closing will be subject to the restrictions set out in Section 14 of this Circular. CHAPTER IV Permissible Investments SECTION 6. Permissible Investments . Subject to receipt of the approvals referred to in Section 18 and Section 19 of this Circular, the Peso proceeds of Convertible Debt redeemed in connection with a Conversion Transaction may be invested in a Schedule 2 Investment or a Schedule 3 Investment. LLphil SECTION 7. Equity Investments . The Peso proceeds of a Conversion Transaction may be invested in a Philippine Enterprise only in the form of an equity investment. In the context of a Philippine Enterprise that is a stock company, such investment may be made either in common shares or (subject to the restrictions on guaranteed dividends referred to in Sections 10 and 12 below) in preferred shares. In the context of a Philippine Enterprise that is not a stock company, such an investment should be evidenced by an ownership interest in the Philippine Enterprise concerned. In cases involving non-Philippine investors, however, such transactions will be subject to any generally applicable restrictions on foreign ownership in enterprises located in the Philippines. SECTION 8. Restrictive Legend . Each share certificate or other document evidencing the ownership interest in an investment made under the Program should be prominently marked with the following legend: "This instrument was issued in connection with a [Schedule 2 Investment] [Schedule 3 Investment] made in accordance with Central Bank Circular No. 1111, dated August 4, 1986 (the "Circular"). The repayment of the capital portion of the investment evidenced by this instrument, and the payment of dividends or current income in respect of such investment, are subject to certain restrictions as set out in the Circular, and the owner of this instrument is subject to certain reporting and certification requirements as set out in the Circular." CHAPTER V Repayment Restrictions on Schedule 2 Investments SECTION 9. Capital . Subject to the provisions of Section 13 below, the capital portion of a Schedule 2 Investment may not be repaid by the Philippine Enterprise within the first 3 years after the investment is made. In each of the 4th through the 8th years after the investment is made, not more than 20% of the capital portion of the investment may be repaid in any year; provided that any unused portion of the amount permitted to be repaid in any such year may be repaid in subsequent years. LLphil SECTION 10. Dividends . Dividends or current income in respect of a Schedule 2 Investment may be paid out of profits of the Philippine Enterprise in, which the investment is made; provided that no guaranteed dividends or similar arrangement that is not linked to profits may be implemented in connection with a Schedule 2 Investment. CHAPTER VI Repayment Restrictions on Schedule 3 Investments SECTION 11. Capital . Subject to the provisions of Section 13 below, the capital portion of a Schedule 3 Investment may not be repaid by the Philippine Enterprise within the first 5 years after the investment is made. For each of the 6th through the 10th years after the investment is made, not more than 20% of the capital portion of the investment may be repaid in any year; provided that any unused portion of the amount permitted to be repaid in any such year may be repaid in subsequent years. SECTION 12. Dividends . Dividends or current income in respect of a Schedule 3 Investment may not be paid by the Philippine Enterprise within the first 4 years after the investment is made. Thereafter, dividends and current income in respect of a Schedule 3 Investment may be paid out of profits of the Philippine Enterprise in which the investment is made; provided that no guaranteed dividends or similar arrangement not linked to profits may be implemented in connection with a Schedule 3 Investment. CHAPTER VII Liquidation SECTION 13. Involuntary Liquidation . In the event that any portion of the capital of a Schedule 2 Investment or a Schedule 3 Investment is repaid as a result of a liquidation, dissolution or winding-up of the Philippine Enterprise concerned, and all or any part of the amount so repaid is in excess of the amount permitted to be repaid under the terms of Section 9 or Section 11 (as the case may be) of this Circular in the year in which the investor receives such a repayment of capital in connection with such liquidation, dissolution or winding-up, the owner of the investment shall have the option of either: (i) reinvesting such excess amount in an approved equity investment under this Program: provided that if the original investment constituted a Schedule 2 Investment, any investment of the excess amount under this Section must also be in a Schedule 2 Investment; and provided further , that for the purpose of applying the provisions of Section 9 or Section 11 in connection with any such reinvestment, the date of the original investment shall be deemed to be the date of the investment of any excess amount; or (ii) depositing an amount equal to such excess amount (in Pesos or foreign currency depending on the currency in which repayment of the investment following the liquidation, dissolution or winding-up of the Philippine Enterprise was received) with an authorized Philippine commercial bank; provided that the payment of principal of, or interest on, any such deposit shall not be made earlier than the permitted schedule for repayment of capital, or dividends or current income, in respect of the original investment had the liquidation, dissolution or winding-up not occurred. SECTION 14. Voluntary Liquidation . At any time following the second anniversary of the closing date of a Conversion Transaction, the investor may sell its interest in the investment, and transfer the share certificates or other documents evidencing the ownership of the investment, to another person (the " Purchaser "); provided that at the time of such sale the Purchaser submits to the Debt Restructuring Office a certificate in such form as may be prescribed by that Office confirming (i) that the Purchaser understands that repayment of the capital of, and dividends or current income on, the investment is subject to certain restrictions as set out in this Circular, and (ii) the Purchaser agrees to assume all the obligations (including the periodic reporting and certification obligations) of the original investor set out in this Circular in respect of the investment. Following the completion of any such sale and transfer, the Purchaser shall for the purposes of this Circular be deemed to be the investor in respect of the investment concerned. CHAPTER VIII Fees SECTION 15. Application Fee . At the time of submitting an application for approval of a Conversion Transaction, the investor shall be required to pay to the Central Bank a non-refundable application fee equal to P10,000 until the Monetary Board shall otherwise provide. LLphil SECTION 16. Schedule 2 Fees . At the time of closing of any Conversion Transaction involving a Schedule 2 Investment, the investor shall pay to the Central Bank a Peso fee calculated in the manner described in Schedule 4 to this Circular. Investors are reminded that Schedule 4 is subject to revision from time to time, and the terms of Schedule 4 as in effect on the date on which a completed application for the relevant Conversion Transaction is received by the Debt Restructuring Office shall govern the fee payable in respect thereof. SECTION 17. Schedule 3 Fees . At the time of closing of any Conversion Transaction involving a Schedule 3 Investment, the investor shall pay to the Central Bank a Peso fee calculated in the manner described in Schedule 5 hereto. Investors are reminded that Schedule 5 is subject to revision from time to time, and that the terms of Schedule 5 as in effect on the date on which a completed application for the relevant Conversion Transaction is received by the Debt Restructuring Office shall govern the fee payable in respect thereof. CHAPTER IX Fresh Money Requirements SECTION 18. Fresh Money Requirements . Schedule 6 to this Circular shows the minimum percentage of the total investment relating to a Conversion Transaction that must be funded by the investor with Pesos purchased from the Central Bank or an authorized Philippine commercial bank at prevailing exchange rates. CHAPTER X Applications ; Approvals SECTION 19. Relationship to Other Foreign Investment Laws . Nothing in this Circular shall be deemed to supersede or alter any other requirement of Philippine law or regulation relating to foreign investment approvals. Accordingly, to the extent required by the Omnibus Investments Code, other foreign investments laws or applicable Central Bank regulations, investors should separately seek necessary approvals from the Board of Investments or other agencies of the Government in connection with any investment involving a Conversion Transaction. SECTION 20. Applications ; Approvals . Each investor wishing to engage in a Conversion Transaction shall submit (in triplicate) an application in the form attached to this Circular as Exhibit A, together with any appropriate supporting materials, to the Debt Restructuring Office at the address shown on the first page of this Circular. The Debt Restructuring Office shall have the authority to seek from the investor any clarification or additional supporting materials as that Office may find useful in assessing a proposed Conversion Transaction. Unless the investor consents to a longer period, the Debt Restructuring Office will notify the investor of the decision of the Monetary Board (to be made in the sole discretion of the Monetary Board after consultation with such other Government agencies and offices, including the Board of Investments, as it may feel appropriate) to approve or to disapprove a proposed Conversion Transaction within 45 days of the date on which the investor's application is complete. A negative decision in respect of an application is without prejudice to the investor's ability to resubmit the application or a modified version thereof at a subsequent time. CHAPTER XI Conversion Transaction Mechanics SECTION 21. Closing Period . If the Monetary Board approves a proposed Conversion Transaction, the investor shall have 60 days from the date of such approval to close the transaction, unless the Debt Restructuring Office grants an extension of this period. if the investor fails to close the Conversion Transaction within such period, the approval relating to that transaction shall automatically lapse. SECTION 22. Arrangements for Obtaining Convertible Debt . During the 60-day period referred to in Section 21 above, the investor will make arrangements satisfactory to itself with the holder or holders of one or more items of Convertible Debt that would permit the presentation of such debt to an Obligor in return for an equivalent amount of Pesos (to be determined at the exchange rate prevailing at the time of redemption). The Obligor's consent shall be required to any such Peso redemption of Convertible Debt. The approval given by the Monetary Board in connection with the relevant Conversion Transaction will be deemed to be the approval not only of the Central Bank but also of the Republic of the Philippines to the redemption of any item of Convertible Debt in a manner consistent with such approval and this Circular. In the event that the holder of the item of Convertible Debt requests that the redemption take place on a date that could give rise to a claim for broken-funding or deposit redeployment indemnities from the Obligor, such holder will be expected to waive any such claim. The attention of investors is drawn to the restriction contained in Section 12.10(a) of each Restructuring Agreement limiting direct assignments of credits covered by those Agreements to "banks or financial institutions". Although the Philippine Government intends to seek an amendment to each of these provisions that would permit the direct assignment of an interest in those Agreements to commercial enterprises where the assignee certifies that the assigned credit will be redeemed in connection with an approved Conversion Transaction within a specified period, until such amendments become effective any arrangements entered into by an investor involving Convertible Debt falling under Category (A) of Schedule 1 will require that the holder of the debt being presented for redemption qualify as a bank or financial institution. LLphil SECTION 23. Closing . On the closing date for a Conversion Transaction, the Convertible Debt in question shall be deemed to be redenominated into its Peso equivalent (determined as of the closing date) using the Central Bank Buying Rate and the Obligor shall pay to the investor such Peso equivalent. The investor shall on the closing date pay to the Central Bank the fee called for by Section 16 or Section 17 of this Circular (as the case may be), and shall have 5 days within which to make the investment. SECTION 24. Central Bank Peso Credit . In cases in which an obligor which is a government-owned or controlled corporation does not have sufficient Pesos from its own resources in order to redeem an item of its Convertible Debt that is proposed to be discharged in Pesos in connection with a Conversion Transaction, such Obligor may request an extension of Peso credit for this purpose from the Central Bank to be advanced through a Philippine commercial bank. The Central Bank may, in its sole discretion, approve or disapprove any such request. If such a loan is extended through a Philippine commercial bank, the Central Bank may limit any fee that may be charged by such commercial bank in connection with any such transaction. CHAPTER XII Compliance SECTION 25. Registration and Post-Closing Notification . All equity investments made pursuant to this Circular shall be registered with the Central Bank through the Debt Restructuring Office. Within 10 days after the closing of any Conversion Transaction, the investor shall submit to the Debt Restructuring Office a notification in the form attached to this Circular as Exhibit B. LLphil SECTION 26. Annual Compliance Certificates . Within 10 days following each anniversary of the closing date of a Conversion Transaction occurring during any period in which restrictions on the repayment of capital under Chapter V or Chapter VI of this Circular are applicable to such investment, the investor shall submit to the Debt Restructuring Office a report (in the form of Exhibit C to this Circular) indicating the amount of capital and dividends paid in respect of such investment during the preceding 12 months. CHAPTER XIII Request for Public Comment SECTION 27. Effective Date of Program . The Program described in this Circular shall be effective on the date set forth on the last page hereof and shall apply to all Conversion Transactions closed after that date. Revised versions of any Schedule attached to this Circular shall apply to all Conversion Transactions for which the Debt Restructuring Office, receives a completed application in accordance with Section 20 above during the period in which such revision is in effect, regardless of any subsequent revision of such Schedule released between the date of application and the date of closing of the Conversion Transaction. SECTION 28. Request for Public Comments . The Central Bank hereby solicits comments from all interested persons on any aspect of the Program described herein. Such comments should be submitted in writing, in typed, double-spaced format, to the Debt Restructuring Office at the address shown on the first page of this Circular and each comment should bear the legend "Comments on Central Bank Circular No. 1111", All comments should be received by the Debt Restructuring Office within 60 days from the effective date of this Circular. SECTION 29. Further Central Bank Consideration . Following the close of the comment period referred to above, the Central Bank may amend this Circular reflecting certain suggestions contained in such comments, or reflecting the Central Bank's experience in administering the Program during the period since its inception, if the Central Bank believes that such amendments would facilitate the smooth operation of the Program and further the attainment of the Program's objectives. SECTION 30. Administrative Discretion . The Monetary Board may allow a deviation on a case to case basis from any provision of this Circular as it applies to a specific Conversion Transaction, if it determines that such deviation is warranted in light of special circumstances surrounding the transaction and is in furtherance of the objectives of the Program. LLphil CHAPTER XIV Definitions SECTION 31. Definitions . When used in this Circular, the following terms shall have the meanings indicated below.. " Board of Investments " means the Board of Investments of the Philippines. " Central Bank " means the Central Bank of the Philippines. " Central Bank Buying Rate ", for the purpose of determining the Peso equivalent of a foreign currency amount as of the closing date of a Conversion Transaction, means the buying rate quoted by the Central Bank for the purchase of such foreign currency with Pesos at approximately 11:00 a.m. (Manila time) of the banking day (in Manila and Makati) next preceding such closing date. " Convertible Debt " means any item of external debt of a Philippine Public Sector Borrower or a Philippine Private Sector Borrower falling within a category described in Schedule 1 hereto. " Conversion Transaction " means any transaction involving an investment in a Philippine Enterprise that is made, in whole or in part, with the proceeds of the redemption of an item of Convertible Debt. " Debt Restructuring Office " means the Debt Restructuring Office of the Central Bank. " Investment Priorities Plan " means, for any year, the Investment Priorities Plan prepared by the Board of Investments and approved by the President of the Philippines. " New Money Agreement " means that certain $925 million Credit Agreement dated as of May 20, 1985 among the Central Bank as Borrower, the Republic of the Philippines as Guarantor and the banks and financial institutions parties thereto. " Obligor " means the obligor in respect of an item of Convertible Debt. " Omn ibus Investment Co de " means the Omnibus Investments Code of the Philippines (P.D. 1789) as amended by the Investment Incentives Policy Act of 1983 (B.P. 391), as such Code may be further amended from time to time. " Philippine Enterprise " means any partnership, joint venture, cooperative, corporation or other form of business association incorporated or organized under the laws of the Philippines. " Philippine Private Sector Borrower " means any Philippine debtor in respect of an item of external debt other than any Philippine Public Sector Obligor. " Philippine Public Sector Borrower " has the meaning ascribed to that term "Philippine Public Sector Obligor" in the Restructuring Principles. " Program " means the program for the conversion of public sector external debt into equity investments in Philippine Enterprises set forth in this Circular. " Restructuring Agreement " means a Restructuring Agreement signed by a Philippine Public Sector Borrower (dated as of January 10, 1986 or April 16, 1986) implementing the Restructuring Principles, as any such Restructuring Agreement may be amended from time to time. " Restructuring Principles " means the Restructuring Principles that accompanied the communication to the international banking community dated November 2, 1984 from Cesar E.A. Virata, then Prime Minister and Minister of Finance of the Republic of the Philippines, and Jose B. Fernandez, Jr., Governor of the Central Bank of the Philippines. LLphil " Trade Facility " means that certain Revolving Short-Term Trade Facility Agreement dated as of May 20, 1985 among the Central Bank of the Philippines, the Republic of the Philippines as Guarantor, Chemical Bank as Coordinating Bank, and the banks and financial institutions parties thereto, as such Trade Facility may be amended from time to time. " Schedule 2 Investment " means in the context of a Conversion Transaction, any investment in a Philippine Enterprise that is engaged (or proposes to engage) principally in an economic activity or project listed in Schedule 2 to this Circular. " Schedule 3 Investment " means in the context of a Conversion Transaction, any investment in a Philippine Enterprise that is engaged (or proposes to engage) principally in an economic activity or project listed in Schedule 3 to this Circular. This Circular shall take effect on August 4, 1986. For the Monetary Board: (SGD.) JOSE B. FERNANDEZ, JR. Governor