Director F.M. Carandang

September 12, 1991 Director F.M. Carandang Management of External Debt Department Central Bank of the Philippines Manila S i r : This refers to your letter of August 5, 1991 requesting opinion/comments whether or not the proposed issuance by FILSYN CORPORATION of P400 million bonds, which are convertible to equity at the option of the bondholders or repayable through the issuance of common shares, will no longer be classified as a liability but as part of the equity portion of the Balance Sheet under the heading of Bond Payable in Equity. LibLex Debt and equity securities represent totally different relationships between the issuer and the security holder. Equity securities represent ownership rights which, in varying degrees, depending upon the type of equity security, entitle the holder to a right to participate in surplus profit, and, upon dissolution, to share in those assets which remain after all debts have been paid. Debt securities , on the other hand, require the issuer to repay the principal amount loaned to the corporation at a fixed maturity date and to do so at a stated rate of interest. The difference between the ownership and creditor interests is one that cannot be erased by mere labels . (6-A Fletcher Cyclopedia Corporations Sec. 2635, citing several cases, emphasis supplied) The "SEC Interim Guidelines for the Registration of Bonds" defines "bonds" as follows: " Bonds shall refer to securities representing denominated units of indebtedness issued by a corporation to raise money or capital obliging the issuer to pay the maturity value at the end of a specific period which should be not less than 360 days, and where applicable, payment of interest on stipulated dates. (Emphasis supplied) It is therefore settled that bonds are liabilities of the issuer. In the present case, the option given to bondholders to convert the bonds to equity is not an assurance that they will opt for conversion. Hence, the convertibility feature of the bonds does not make them equity securities. Besides, the conversion of the bonds to common shares takes the nature of issuance of shares by way of offset of liabilities which requires prior approval of the Commission. Accordingly, unless the bonds are actually converted into common shares , they cannot be classified as capital to form part of the equity portion in the Balance Sheet. Please be advised accordingly. Very truly yours, (SGD.) ROSARIO N. LOPEZ Chairman