Program for the Conversion of Philippine External Debt into Equity Investments

December 20, 1990 CBP CIRCULAR NO. 1267-90 PROGRAM FOR THE CONVERSION OF PHILIPPINE EXTERNAL DEBT INTO EQUITY INVESTMENTS In accordance with Monetary Board Resolution No. 1230 dated November 16, 1990, this Circular contains the revised 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 44 hereof. Inquiries and other communications regarding this Circular or the Program should be directed to the Debt Restructuring Department, Central Bank of the Philippines, Roxas Boulevard, Malate, Manila. dctai 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 Department. Parties who contemplate entering into a Conversion Transaction under this Program are advised to obtain from the Debt Restructuring Department 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 (i) to stimulate long-term equity investments in Philippine enterprise by both foreign investors and Filipinos; (ii) 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; (iii) to provide additional incentives for investment in designated sectors of the Philippine economy that require prompt revitalization; and (iv) 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 or 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 Pesos, 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 on the country's foreign exchange reserves by the need to make current debt service payments on existing foreign currency indebtedness. Section 5.11 of each Restructuring Agreement signed by a Philippine Public Sector Borrower, Section 5.11 of the New Money Agreement, and Section 4 (d) of the Terms and Conditions of the New Money Bonds permit (with the consent of the Central Bank and the Republic of the Philippines) the discharge of any credit covered by any of such Agreements or Bonds through the payment 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 the relevant loan agreement to discharge its external debt obligations in Pesos, or the creditor otherwise consents to this arrangement. 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. The guidelines contained in this Circular may be revised and updated from time to time through revisions or supplements to this Circular, or through revisions of the Schedules attached hereto. Any such supplement or revision shall become effective only with respect to completed 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 . For the purposes of this Circular, the categories of Philippine external debt that may be redeemed in connection with a Conversion Transaction are set out in Schedule 1 of this Circular. CHAPTER III Conversion Process SECTION 5. Central Bank Debt . The auction system, the mechanics of which are described in Chapter XIII hereof, shall be adopted in order to allocate the rights to convert Central Bank Convertible Debt, except as otherwise provided herein. SECTION 6. Other Public Sector Debt . The conversion of direct and assumed external debt obligations of the Republic of the Philippines and other Philippine Public Sector Borrowers shall be in accordance with the guidelines prescribed by the Department of Finance, in coordination with the Central Bank. Peso repayments or prepayments in connection with these transactions shall be subject to the Department of Finance and Central Bank approval, pursuant to Section 5.11 of the Public Sector Restructuring Agreements. SECTION 7. Private Sector Debt, Financial and Corporate . Applications involving the conversion into equity of external debt of Philippine Private Sector Borrowers, financial and corporate, wherein the investors have and seek the privilege to repatriate the capital portion of the investment or to remit the earnings thereon, shall not be covered by the auction system but shall be subject to evaluation and approval by the Debt Restructuring Department. Approved transactions shall not be subject to any conversion fee accruing either to the Central Bank or the National Government. The sharing of the discount shall be negotiated between the Obligor and the user of the debt paper. CHAPTER IV Eligible Investors SECTION 8. 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, whose names shall be specified in the application, may act through an agent in filing applications for approval of a Conversion Transaction. Overseas contract workers may likewise participate as investors under the Program, either individually or as a group, provided their proposal involves equity investment and the project qualifies under the regulations. CHAPTER V Permissible Investments SECTION 9. Permissible Investments . Subject to receipt of the approval referred in Section 30 of this Circular, the Peso proceeds of Convertible Debt redeemed in connection with a Conversion Transaction may be invested in a Preferred Investment or a Less Preferred Investment. LLjur SECTION 10. 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 15 and 17 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 transaction will be subject to any generally applicable restrictions on foreign ownership in enterprises located in the Philippines. SECTION 11. 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 [Preferred Investment] [Less Preferred Investment made in accordance with Central Bank Circular No. _________, dated ___________, 1990, (the Circular"). The repayment and repatriation of the capital portion of the investment evidenced by this instrument, and the payment and remittance 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." SECTION 12. Use of Peso Proceeds . In determining the eligibility of an investor to Participate in an auction, the Debt Restructuring Department shall inquire into the proposed use of the Peso proceeds of such transaction by the Philippine Enterprise concerned. Peso proceeds of such transactions should be used for the purchase by the Philippine Enterprise of new capital equipment or tangible goods necessary to expand production or increase the efficiency of existing operations; the construction of new or expanded plant capacity; land acquisition provided it is related to business of the project; or other uses designed to increase the supply of goods or services produced or offered by the Philippine Enterprise. Among the uses of Peso proceeds that shall not be permitted are a) the purchase of existing assets or shares of a Philippine Enterprise (without an infusion of new capital or expansion of productive capacity except bank privatization); b) land acquisition for speculative purposes; c) portfolio investments; d) increases in working capital; and e) financial restructuring or repayment of Peso indebtedness of the Philippine Enterprise. Portfolio investments shall refer to investments in issues of Philippine stocks and bonds listed and traded in the local stock exchanges. CHAPTER VI Excluded Transactions SECTION 13. Excluded Transactions . Certain transactions involving the redemption in pesos of eligible foreign obligations are excluded from the coverage of this Circular. These are: (i) Redemption of Central Bank Convertible Debt wherein the proceeds are not invested in equity but used to liquidate outstanding Peso obligations to the Central Bank; (ii) Redemption of external debt obligations of the Republic of the Philippines or any Philippine Public Sector Borrower for the purpose of acquiring assets being disposed of by the obligor thereby involving no cash outflow from the obligor, otherwise known as "Debt for Asset Swaps"; (iii) Redemption of external debt obligations of Philippine Private Sector Borrowers wherein the holder of the debt does not have or does not seek any privilege to repatriate capital or remit earnings thereon; (iv) Redemption of Central Bank Convertible Debt wherein the proceeds are not invested in equity but are placed in medium/long-term Central Bank Peso notes pursuant to the approval of the Central Bank; and (v) Redemption of Central Bank Convertible Debt for projects with high social impact as may be determined by the Monetary Board, such as, but not limited to vocational/ technical educational facilities, non-profit health care and research centers, projects geared toward environmental protection and livelihood projects of oversees contract workers. In all these cases, the investor/donor shall not seek any privilege to repatriate capital or remit earnings thereon. Repayment or prepayment in Pesos of external debt covered by the Restructuring Agreements, New Money Agreement and New Money Bonds shall be subject to prior approval of the Central Bank and the Republic of the Philippines. Repayment or prepayment in Pesos of external debt of Private Corporate Sector Borrowers restructured under Circular Nos. 1076 and 1178 and external debt of Private Financial Sector Borrowers restructured under Circular Nos. 1091 and 1179 shall be subject to the prior approval of the Private Debt Restructuring and Repayment Corporation and the Central Bank, respectively. CHAPTER VII Repayment Restrictions on Preferred Investments SECTION 14. Capital . Subject to the provisions of Section 24 below, the capital portion of a Preferred 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. SECTION 15. Dividends . Dividends or current income in respect of a Preferred 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 Preferred Investment. CHAPTER VIII Repayment Restrictions on Less Preferred Investments SECTION 16. Capital . Subject to the provisions of Section 24 below, the capital portion of a Less Preferred 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 17. Dividends . Dividends or current income in respect of a Less Preferred 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 Less Preferred 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 Less Preferred Investment. CHAPTER IX Repatriation and Remittance SECTION 18. Investment of Resident Investors . Repayment of the capital portion of an investment registered under this Circular and payment of profits in respect thereof received by a Philippine resident investor pursuant to Sections 14, 15, 16 and 17 of this Circular shall not be eligible for repatriation or remittance. SECTION 19. Investments of Non-Resident Investors . Repayment of the capital portion of an investment registered under this Circular and payment of profits in respect thereof received by a non-resident investor pursuant to Sections 14, 15, 16 and 17 of this Circular shall be eligible for repatriation or remittance based on the prevailing exchange rate on the date of repatriation or remittance, subject to Sections 20 and 25 of this Circular and to the applicable withholding taxes, if any. cdlex SECTION 20. Right of Repatriation of Non-Resident Investors . If the investor which is a non-resident sells its investment registered under this Circular for Pesos, the seller retains the right to repatriate the proceeds of the sale within the period prescribed under Section 14 or 16 of this Circular, as the case may be, reckoned from the date of investment in the Philippine Enterprise. For the purpose of this Section, any capital gains from the sale of the investment shall be deemed included in the capital portion of the investment. SECTION 21. Right of Repatriation of Non-Resident Buyers . If a non-resident investor sells its investment registered under this Circular to a non-resident and the purchaser pays the seller with Pesos derived from the sale of foreign exchange to the Central Bank or a Philippine commercial bank at prevailing exchange rates, the non-resident purchaser may repatriate its investment and remit profits in respect thereof in accordance with Circular No. 1028, as such Circular may be amended from time to time. If the purchaser pays the seller with Pesos not so derived from the sale of foreign exchange to the Central Bank or a Philippine commercial bank, the repayment of the capital portion of the investment and payment of profits in respect thereof received by the non-resident purchaser shall not be eligible for repatriation. For the purpose of this Section, any capital gains from the sale of the investment shall be deemed included in the capital portion of the investment. SECTION 22. Prior Central Bank Approval . The repatriation or remittance of the capital portion of an investment and the profits in respect thereof in accordance with this Circular shall require the prior approval of the Debt Restructuring Department. CHAPTER X Liquidation SECTION 23. Minimum Holding Period . The investor may not sell or voluntarily dispose of its interest in the investment until after the second anniversary of the closing date of a Conversion Transaction. SECTION 24. Liquidation . In the event that any portion of the capital of a Preferred Investment or a Less Preferred 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 14 or Section 16 (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 Preferred Investment, any investment of the excess amount under this Section must also be in a Preferred Investment; and provided further , that for the purpose of applying the provisions of Section 14 or Section 16 of this Circular 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) reinvesting such excess amount in non-transferrable Peso-denominated Central Bank debt instruments until the owner of the investment can reinvest such excess amount in an approved equity investment under this Program; provided that the payment of principal of, or interest on, any such reinvestment 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 25. Voluntary Sale . Subject to the minimum holding period prescribed in Section 23 of this Circular, the investor (the "Seller") 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 Department a certificate in such form as may be prescribed by that Department confirming (i) that the Purchaser understands that repayment and repatriation of the capital of, payment and remittance of 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 Purchase shall for the purposes of this Circular be deemed to be the investor in respect of the investment concerned. Where the Seller is a non-resident and the Purchaser pays in Pesos, the Seller shall have the option of either: (i) reinvesting the proceeds of the sale in an approved equity investment under this Program: provided that if the original investment constituted a Preferred Investment, any investment of the such proceeds under this Section must also be in a Preferred Investment; and provided further , that for the purpose of applying the provisions of Section 14 or Section 16 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) reinvesting such proceeds in non-transferrable Peso denominated Central Bank debt instruments until the owner of the investment can reinvest such proceeds in an approved equity investment under this Program; provided that the payment of principal of, or interest on, any such reinvestment 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 sale not occurred. CHAPTER XI Fees/Central Bank Discount Share SECTION 26. Application Fee . At the time of submitting an application for a Conversion Transaction, the investor shall pay to the Central Bank a non-refundable application fee equal to P15,000 until the Monetary Board shall otherwise provide. SECTION 27. Central Bank Share in the Discount Preferred Investment . The share of the Central Bank in the discount for Conversion Transactions classified as Preferred Investments shall be calculated in the manner described in Schedule 4 to this Circular. SECTION 28. Central Bank Share in the Discount Less Preferred Investment . The share of the Central Bank in the discount for Conversion Transactions classified as Less Preferred Investment shall be calculated in the manner described in Schedule 5 to this Circular. CHAPTER XII Applications ; Approvals SECTION 29. 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 30. 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 Department. The Debt Restructuring Department shall have the authority to seek from the investor any clarification or additional supporting materials as that Department may find useful in assessing a proposed Conversion Transaction. cdll If the application calls for the use of Central Bank Convertible Debt and the application is subject to the auction system, the proponent shall be notified within a reasonable period before the scheduled auction date of his eligibility to participate in the auction, the classification of the proposed investment as preferred or less preferred and the maximum face amount of Convertible Debt that may be tendered in the bid. CHAPTER XIII Auction Mechanics SECTION 31. Program Size, Auction Amount ; Redemption Price Ceiling . The Central Bank shall auction over a 3-year period the right to use Central Bank Convertible Debt in Conversion Transactions in the aggregate amount of US$900 million based on the face value of the Convertible Debt. Such amount may be increased at the discretion of the Monetary Board after taking into consideration the monetary and credit situation and the secondary market price of Central Bank Convertible Debt. The allocation for any particular auction shall be announced within a reasonable period prior to the scheduled auction date. Redemption in Pesos of Central Bank Convertible Debt for projects determined to have high social impact shall be included in the ceiling. A maximum redemption price or bids shall be adopted for each auction and announced at least a week before the scheduled auction date. SECTION 32. Participants ; Manner . Under the auction system, applicants with identified projects deemed as eligible by the Central Bank either as a Preferred Investment or a Less Preferred Investment may participate in the auction. Creditors intending to use their original Central Bank Convertible Debt for their own equity investments, regardless of category, shall also bid for the right to use said debt for a Conversion Transaction. Prospective inventors with prequalified applications shall submit sealed bids stating the redemption price as a percentage of the face value of the Central Bank Convertible Debt that they are willing to accept from the Central Bank. The face value of the Central Bank Convertible Debt indicated in the bid shall be in increments of US$10,000.00 The total amount of bids that can be accepted for any single project per auction shall not exceed 20% of the amount to be auctioned. The right to use Central Bank Convertible Debt shall be awarded to the lowest bidder, then to the next lowest bidder and so on until the auction amount shall have been covered. In case of a tie in the bid price and the balance of the amount available for the auction is insufficient to cover all winning bids, the balance shall be distributed pro-rata on the basis of the tied bids. The Central Bank shall have the right to reject any or all bids. Applications involving projects with high social impact shall not be subject to the auction system. Instead, decisions shall be made by the Monetary Board on a case-by-case basis. Out of the total amount to be auctioned, a maximum of 10% of said amount shall be allocated for this type of projects. However, the percentage may be adjusted as the Monetary Board may determine. The redemption price shall be equivalent to the highest accepted bid price in the immediately preceding auction. SECTION 33. Closing Period . The investor shall have 90 days from the date of award in an auction or the date of approval by the Central Bank to close the Conversion Transaction involving Central Bank Convertible Debt. If the investor fails to close the Conversion Transaction within such period, the approval relating to that transaction shall automatically lapse. SECTION 34. Bid Bond . Upon submission of a bid, the investor shall put up a bid bond in the form of a Manager's or Cashier's Check equivalent to 2% of the face value of the Central Bank Convertible Debt to be surrendered. The bid bond shall be returned or refunded promptly to losing bidders after auction date and to winning bidders who close the Conversion Transaction within the closing period. The bid bond shall be forfeited in the case of winning bidders who do not close the Conversion Transaction within the above described period. The cash bid bond shall be kept in a non-interest bearing account until such time that such bonds are refunded to the investors. SECTION 35. Arrangements for Obtaining Convertible Debt . During the 90-day period referred to in Section 33 of this Circular, 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) net of the share of the Obligor in the discount. The Obligor's consent shall be required to any such Peso redemption of Convertible Debt of a Philippine Private Sector Borrower. The approval given in connection with the relevant Conversion Transaction under the Circular 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 would 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. SECTION 36. 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 net of the share of the Obligor in the discount. SECTION 37. Interim Investment . In any case in which the Central Bank determines that the full amount of the Peso proceeds of a Conversion Transaction in respect of Central Bank Convertible Debt will not be required by the Philippine Enterprise at the time of closing of the Conversion Transaction for the approved purpose, the Central Bank may require that the amount of such excess Peso proceeds be invested in non-transferrable Peso-denominated Central Bank debt instruments with maturities corresponding to the anticipated schedule of Peso requirements by the Philippine Enterprise. CHAPTER XIV Compliance SECTION 38. Registration and Post-Closing Notification . All equity investments of non-residents made pursuant to this Circular shall be registered with the Central Bank through the Debt Restructuring Department. Within 10 days after the closing of any Conversion Transaction, the investor, whether resident or non-resident, shall submit to the Debt Restructuring Department a notification in the form attached to this Circular as Exhibit B. SECTION 39. 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 VII or Chapter VIII of this Circular are applicable to such investment, the investor shall submit to the Debt Restructuring Department 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. SECTION 40. Verification of Use of Peso Proceeds . The investor shall cause the Philippine Enterprise to submit such reports (and supporting materials) regarding the use of the proceeds of a Conversion Transaction as may be requested from time to time by the Debt Restructuring Department, and to permit the inspection of the premises of the Philippine Enterprise or its records for the purpose of verifying such use of proceeds. The Central Bank shall have the option to engage the services of an external auditor for the purpose of verifying at least once a year the representations/commitments made by the investor or the Philippine Enterprise in the application for debt to equity conversion and the pertinent conditions imposed in its approval, the cost of which engagement to be paid by the Philippine Enterprise. CHAPTER XV Miscellaneous SECTION 41. Effective Date of Revisions . Revisions to this Circular and revised versions of any Schedule attached to this Circular shall apply to all Conversion Transactions for which the Debt Restructuring Department receives a completed application in accordance with Section 30 above during the period in which such revision is in effect, regardless of any subsequent revision of such Circular or Schedule issued between the date of application and the date of closing of the Conversion Transaction. Revised versions of Schedule 1 to this Circular shall apply to the closing of all Conversion Transactions during the period in which said revision is in effect. SECTION 42. 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. SECTION 43. Sanctions . Any violation of this Circular or misrepresentations in the application relevant to eligibility or investment classification committed by the investor or his authorized agent shall subject the investor to sanctions, including but not limited to the following: i) loss of repatriation/remittance privilege; ii) watchlisting of the person or persons responsible therefor; and iii) disqualification from future bidding. CHAPTER XVI Definitions SECTION 44. Definition . 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) immediately preceding such closing date. " Convertible Debt " means any item of external debt of the Central Bank falling within a category described in Schedule 1 hereto and external debt of Philippine Private Sector Borrower, corporate or financial, as defined below. " 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 Department" means the Debt Restructuring Department 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. " Less Preferred 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. " 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, as such New Money Agreement may be amended from time to time. " New Money Bonds " means bonds issued by the Central Bank pursuant to the Bond Subscription Agreement dated February 28, 1990 among the Central Bank as Issuer, the Republic of the Philippines as Guarantor and the banks and financial institutions parties thereto, as such Bond Subscription Agreement may be amended from time to time. " Obligor " means the obligor in respect of an item of Convertible Debt. " Omnibus Investments Code " means the Omnibus Investments Code of 1987 of the Philippines (Executive Order No. 226 dated July 16, 1987), as such Code may be amended from time to time, and any successor statute thereto. " 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 the term "Philippine Public Sector Obligor" in the Restructuring Principles. " Preferred 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. " Program " means the program for the conversion of 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 the Secretary of Finance and the Governor of the Central Bank of the Philippines, as amended and supplemented by the Term Sheet captioned "1987-92 Restructuring of Philippine External Debt Owed to Commercial Banks" which accompanied a communication from the Secretary of Finance and the Governor of the Central Bank of the Philippines to the international banking community dated March 27, 1987. This Circular supersedes Revised Circular No. 1111. aisadc The Circular shall take effect immediately. FOR THE MONETARY BOARD: (SGD.) JOSE L. CUISIA, JR. Governor Schedule 1 CATEGORIES OF CONVERTIBLE DEBT The following categories of external debt of the Central Bank and Philippines Private Sector Borrowers shall be eligible for redemption in connection with a Conversion Transaction: CATEGORY DESCRIPTION (A) All principal maturities of external debt covered by the Central Bank Restructuring Agreement. (B) Advances outstanding under the New Money Agreement. (C) New Money Bonds. (D) All principal maturities of external debt owed by Philippine Private Sector Borrowers; provided that the existing credit instrument relating to any such debt permits the prepayment or repayment of such obligation through the delivery of an equivalent amount of Pesos, or appropriate creditor consents thereunder to such prepayment or repayment have been obtained. (E) Other debt obligations on such terms and subject to such conditions as may be approved in each case by the Monetary Board. Schedule 2 PREFERRED INVESTMENTS For purposes of this Circular, a Preferred Investment means any approved equity investment in a Philippine Enterprise that is engaged (or proposes to engage) principally in one or more of the following areas of economic activity: 1. The production, manufacturing or processing of export products from the Philippines; provided that the Philippine Enterprise is registered as an export producer (at least 50% of total production) by the Board of Investments (BOI), Export Processing Zone Authority (EPZA) and/or another agency of the Philippine Government, and the Monetary Board determines to recognize such registration for this purpose. 2. Banking insofar as it involves (a) the acquisition of shares of stock of a bank owned directly or indirectly by the Government and being disposed of under the government's privatization program, or (b) acquisition of new shares in a bank under a Central Bank-approved rehabilitation program; 3. Agriculture, as defined in the Investment Priorities Plan currently in effect at the time the application for a Conversion Transaction is submitted; and 4. Investment in a Philippine Enterprise that is principally engaged (or proposes to engage) in energy-related projects as defined in the Investment Priorities Plan currently in effect at the time the application for a Conversion Transaction is submitted. __________________________ Note: In determining whether a Philippine Enterprise is engaged (or proposes to engage) principally in one of the areas of economic activity referred to above, the Debt Restructuring Department may consult with the staff of the Export Department of the Central Bank, the Board of Investments or other appropriate Government agencies. Schedule 3 LESS PREFERRED INVESTMENTS For purposes of this Circular, a Less Preferred Investment means any approved equity investment in a Philippine Enterprise that is engaged (or proposes to engage) principally in: 1. Activities listed in the Investment Priorities Plan currently in effect at the time the application for a Conversion Transaction is submitted except those specified as Preferred Investments in Schedule 2 hereof: 2. Banking (primary issues) excluding bank privatization and bank rehabilitation referred to in Schedule 2 hereof; and 3. Such other activities as may be considered less preferred by the Monetary Board. Schedule 4 CENTRAL BANK SHARE IN CONNECTION WITH PREFERRED INVESTMENTS The share of the Central Bank in the discount for Conversion Transactions classified as Preferred Investments and covered by the auction system shall be the difference between the Peso equivalent of the face value of the Central Bank Convertible Debt to be surrendered and the peso redemption proceeds. Until the Monetary Board shall otherwise provide, the Peso redemption proceeds shall be determined by multiplying the Peso equivalent of the face value of Central Bank Convertible Debt to be surrendered by the accepted bid price expressed as a percentage of said face value. Schedule 5 CENTRAL BANKS SHARE IN CONNECTION WITH LESS PREFERRED INVESTMENTS The share of the Central Bank in the discount for Conversion Transactions classified as Less Preferred Investments and covered by the auction system shall be the difference between the Peso equivalent of the face value of the Central Bank Convertible Debt to be surrendered and the Peso redemption proceeds. Until the Monetary Board shall otherwise provide, the Peso redemption process shall be determined by multiplying the Peso equivalent of the face value of Central Bank Convertible Debt to be surrendered by the accepted bid price expressed as a percentage of said face value, less 5% of said face value. Exhibit A FORM OF APPLICATION FOR CONVERSION TRANSACTION ________________ (Date) Debt Restructuring Department Central Bank of the Philippines Room 309, Five-Storey Building Roxas Boulevard, Malate Manila Re : Central Bank Circular No. _________ Application for Conversion Transaction; [Preferred Investment] [Less Preferred Investment] Dear Sirs: We refer to Central Bank Circular No. __________ (the "Circular") and we hereby apply for approval of the Conversion Transaction referred to below. Capitalized terms used in this letter have the meanings given to them in the Circular. I. Details of the Investor 1. Name: Address: Telephone: Telex: Contact Person: II. Detail of the Philippine Enterprise 1. Name: Address: Telephone: Telex: Contact Person: 2. Describe briefly the principal areas of economic or projects in which the Philippine Enterprise engages or proposes to engage. III. Details of Conversion Transaction 1. The type of Convertible Debt that will be redeemed in connection with the Conversion Transaction: ____________ Central Bank Debt ____________ Private Corporate Sector Debt ____________ Private Financial Sector Debt 2. Amount of Convertible Debt that will be redeemed in connection with the Conversion Transaction (expressed in U.S. Dollars): $ ____________ 3. Estimated closing date of the Conversion Transaction: ____________, 199 _____ IV. Details of Investment 1. The investor believes that this investment will qualify as a [Preferred Investment] [Less Preferred Investment]. 2. The investment will be evidenced by [share certificates] [other (please explain)]. 3. The project will be/is located in ____________. 4. The Peso proceeds of the investment will be used for the following purpose: [insert or attach description and amount]. _____ Purchase of new capital equipment or tangible goods for expansion/rehabilitation purposes. Exhibit C FORM OF ANNUAL COMPLIANCE CERTIFICATE ____________ * Debt Restructuring Department Central Bank of the Philippines Room 309, Five-Storey Building Roxas Boulevard, Malate Manila Re : Conversion Transaction for Investment in (insert name of Philippine Enterprise) Dear Sirs: We refer to the Central Bank Circular No. ______________, (the "Circular") and the Conversion Transaction in which we acted as investor involving an approved equity investment (the "Investment") in (insert name of Philippine Enterprise). Capitalized terms used in this letter have the meanings given to them in the Circular. The total Peso amount of the original Investment was P ______________. In connection with the Investment, we hereby certify that during the 12-month period immediately preceding the last anniversary date of the closing date of the Conversion Transaction: 1) The total amount of the capital portion of the investment that was repaid by the Philippines Enterprise was P ___________, which represents _____ % of the total original amount of the Investment. Footnotes * To be submitted within 10 days following each anniversary of the closing date of the Conversion Transaction during any period which capital repayment restrictions apply to the investment.