Mr. Eugenio Nierras, Jr.

June 9, 1980 Mr. Eugenio Nierras, Jr. Deputy Governor Domestic Operations Sector Central Bank of the Philippines Apolinario Mabini St. Malate, Metro-Manila Sir : This is in connection with your letter dated April 16, 1980 requesting for a definitive ruling on whether the Bahayan Pass Through Certificates (as redesigned) are debt instruments or equity securities. It appears that the National Home Mortgage Finance Corporation (NHMFC) originally proposed to issue Bahayan Mortgage Participation certificates (BMPCs) with the following features: "a. The holder thereof is deemed to be an investor in an amount measured by units of participation in the mortgage pool (one unit priced at P1.00); b. The holder of the certificate shall receive by way of earnings on his investment an amount up to 8.5% per annum of the total unit value of the certificate payable quarterly; c. The holder may surrender the certificate on a sell-back option appearing on the face thereof, either to the trustee bank or to any of its authorized agencies or to the corporation itself; d. Six years from issue date, the corporation will return to the investor the principal amount invested in the certificate, unless the investor has earlier surrendered the certificate on the sell-back option granted him." The Commission considered these BMPCs as commercial papers being evidences of indebtedness in its First Indorsement to the Monetary Board of the Central Bank dated October 22, 1979; and in its regular meeting of December 12, 1979, the Commission likewise approved the recommendation of the Monetary Board to exempt BMPC issue from the Rules on Registration of Long Term Commercial Papers and Bonds. Subsequently, the NHMFC proposed to rename the said certificate as "Bahayan Pass Through Certificates (BPTC) and redesigned the same with the apparent purpose of transforming them from debt instruments to equity securities, with the following features: cdlex "1. The BPTC will represent an aliquot share in the pool of mortgages that will be formed by NHMFC; 2. The aforementioned mortgages shall be insured with the Home Financing Corporation (HFC); 3. All payments of principal and interest to the holders shall emanate purely from the collections from the mortgage pool and redemption payments from HFC, if any; 4. The said mortgage pool shall be placed under a trust agreement with the Development Bank of the Philippines which shall act in the following capacities: a. custodian of the mortgage pool b. transfer agent of the securities c. paying/servicing agent of the NHMFC 5. The tax exemption features of the BPTC shall emanate from R.A. 580 (as amended by R.A. Nos. 1557 and 5488 and Executive Order 535) otherwise known as the Home Financing Act." A scrutiny of the material changes in the features of the redesigned BPTC reveals that its original nature and/or classification as a debt instrument is not thereby affected because of the following reasons: 1. BPTC remains an aliquot share in the pool of mortgages and such mortgages evidence indebtedness . With the mortgages as the mother paper and BPTC as its offspring, it follows that BPTC is undoubtedly a debt instrument. 2. The return or appreciation on BPTC instrument is in terms of interest and not dividends as in the case of equity shares. 3. The presence of insurance with HFC and trust agreement of BPB does qualify the instrument as an equity share for such features also obtained in loan transactions. LexLib Please be advised accordingly. Very truly yours, For the Chairman: (SGD.) ROSARIO N. LOPEZ Director Corporate and Legal Department