Corporate deadbeat?

Dictionary.com defines “deadbeat” as a person who deliberately avoids paying debts. President Duterte has just accused the Lopez Group of being a corporate deadbeat. Is the accusation justified?

I retired from the Lopez Group seven years ago. It is not my job to defend them in the public arena and I do not speak for them on this or any other issue. The current generation of Lopezes is so low key they would rather say nothing.

But I worry that the level of public discussion emanating from the Palace has degenerated into gossip when it should be based on facts. I feel I ought to try to examine the accusation, or at least put things in context. Fake news should not go unchallenged.

I have some knowledge of the issues raised because this is not the first time these issues were raised. I don’t have the specifics because the long weekend prevented me from checking records with the Lopez Holdings staff. But I have a general view that provides the necessary perspective to understand the issue.

Last Thursday evening, Lopez Holdings issued a statement saying it “does not have any unpaid obligations with the Development Bank of the Philippines (DBP) or other government financial institutions. What President Duterte mentioned in his remarks on Aug. 30 may refer to debt papers originally held by DBP and subsequently, sold by DBP to a Special Purpose Vehicle (SPV). All debt papers including those sold by DBP to the SPV were eventually settled by the company.”

If that is the case, the President might have been misinformed. The Lopezes do not have a shortage of enemies, which explains why this issue gets resurrected every now and then. So, what does the Lopez Holdings statement really mean?

It started when former president Fidel V. Ramos asked the Lopezes to invest in public infrastructure projects. The Lopezes chose NLEX and one of the concession areas of MWSS which eventually became known as Maynilad. They also invested in putting up a pioneering national telecom backbone and in providing telephone service in Quezon City, the Bicol region and Eastern Visayas.

To help finance the projects, Lopez Holdings (then known as Benpres) borrowed from the financial market by issuing Long Term Commercial Papers (LTCP), which are essentially tradable corporate debt. Apparently, DBP was one of the financial institutions and private investors which bought the Lopez debt papers. Everything was fine and everyone was happy as interest was paid on the debt without fail.

Then came the Asian Financial Crisis. All of a sudden the exchange rate of around P25 to the dollar doubled to over P50 to the dollar. The Lopez Group borrowed from abroad and was also responsible for paying 90 percent of MWSS’s foreign debt.

Theoretically, the Lopez Group could recover foreign exchange losses in Maynilad over 25 years. But cash was needed for daily operations and the administration refused to grant early rate increase.

So the Lopez Group went into a debt default which affected debts not only to DBP, but to all creditors. To show goodwill, the Lopez Group paid some interest until formal debt restructuring talks could determine what happens next. There was also court supervised debt restructuring.

With the Asian crisis and the Lopez default, the value of its debt papers, including the LTCP went down. SPVs or Special Purpose Vehicles took advantage of the crisis. Some would refer to these SPVs as vulture funds because they thrive by buying distressed assets like the Lopez LTCP debt papers.

DBP held less than 10 percent of total outstanding in the Lopez LTCP. When investments failed as what happened here, all parties shared the pain, not just creditors. Lopez Holdings itself wrote it off, if I remember right, over P20 billion in equity and investments for Maynilad and Bayan Telecommunications alone.

Apparently DBP officials at that time were so panic-stricken that they sold their share of the Lopez LTCP to a vulture fund or SPV at a discount. This way, they might have thought, they could preserve what they could of the bank’s money. After all, they had earned interest on it already and could minimize potential losses by selling to the SPV.

But because they sold at a discount, they had to write off the balance from their books. Eventually, Lopez Holdings conducted a tender offer for its remaining unrestructured debt at 100 percent of the principal amount. At the time of the tender offer, DBP was no longer a creditor of Lopez Holdings, otherwise there would have been no need for a write off.

But the Lopezes had nothing to do with DBP’s decision to sell to a SPV and book a write off. Those were business decisions of DBP officers in the normal course of doing business. If a government bank cannot afford to make such decisions and take on such losses, it shouldn’t be in business.

It would be a different story if the Lopezes got the DBP credit facility by using political clout as in a behest loan. Indeed, the Lopezes didn’t need DBP’s money at that time. If DBP didn’t buy those debt papers, some other investor would have. As I recall, the offer was oversubscribed.

One other occasion I can recall when the Lopez Group had a substantial credit accommodation from DBP was in relation to the privatization of EDC. But that was in the nature of a bridge financing which would have been given to whoever won the bidding.

DBP, ING and Land Bank created a pool to offer the winning bidder the bridge financing to expedite the payment for the controlling shares in EDC. DBP and ING were the financial advisers of government in the privatization of EDC.

Indeed, I recall that the Lopezes were uneasy with the loan. That was partly why they sold their control of NLEX and Meralco to pay that obligation off as quickly as possible.

In other occasions where DBP had exposure to the Lopez Group (BayanTel and SkyCable), it was just one of the creditors treated equally by a court ordered rehabilitation or in negotiation with all creditors. Again, DBP would have been kept whole, had it not sold the loans to third parties.

DBP would have recouped what it wrote off had it waited. But the bank’s management was in a hurry to cut all ties with the Lopez group because the relationship of the Lopezes with the then reigning administration deteriorated.

I found it unfair and laughable that the Lopezes would be accused of being deadbeats. I was working directly under the late Geny Lopez at the time when he and his brothers went to Citibank to pay a loan ABS-CBN made just before martial law and failed to pay because Marcos took over the network and Geny was in exile.

Citibank was surprised, but Geny insisted on paying because when he signed the loan documents he had every intention of paying it back… a kind of word of honor. He had every reason to declare a force majeure which martial law was, but he paid it as soon as he got back on his feet. A debt was a debt as far as he and his family was concerned.

The lesson learned here is for serious investors to stay clear of government banks and financial institutions. I know the Lopezes had misgivings about dealing with GFIs, but it was DBP on its own that bought the debt papers in a public offering… less than 10 percent of total sold.

Nothing behest here… the LTCP, in particular, was a public offering and is as arms length as it could be. But still, once the Palace tenant gets irritated with the way ABS-CBN professionally reports the news, all hell breaks loose and the same old story is regurgitated. Totally unfair, but that’s life and something the Lopezes are so used to by now.

Maybe someone should explain to the President what a SPV is and why once DBP sells debt papers at a discount, government can’t go after the issuer for the amount DBP has written off. Finance 101.

Boo Chanco’s e-mail address is bchanco@gmail.com. Follow him on Twitter @boochanco.