DBP-Ongpin-Philex controversial deals detailed

by Lala Rimando, ABS-CBNnews.com Special Report

Posted at May 25 2011 02:46 PM | Updated as of Aug 05 2011 06:11 AM

Trading Philex: The curious case of a P510-M DBP loan

First of two parts

MANILA, Philippines – Reynaldo David vividly recalled having lunch with peers in June 2009 when he received a call. He was asked to attend the annual shareholders meeting of Philex Mining Corp., the country’s oldest mining company, in a Makati hotel a few blocks away from the headquarters of state-owned Development Bank of the Philippines (DBP) where he was vice chairman and president. The Philex shares of DBP would help meet the required quorum. David agreed to attend.

Present at the stockholders meeting were Manuel V. Pangilinan who steers one of the country’s biggest diversified conglomerates, and Roberto “Bobby” V. Ongpin, a former Marcos crony who has or represents major stakes in real estate, power, energy and telecommunication firms. Pangilinan was eventually voted as the chairman of the board of Philex Mining, while Ongpin was vice chair. David completed the 11-man board.

“I did not expect to become a Philex director but became one at the end of that day (June 24, 2009),” David told abs-cbnnews.com in an interview. He was voted as an independent director and not a representative of DBP, which, at the time, had only 109 million shares, representing a paltry 0.003% of all Philex owners with voting rights. But these were enough for Philex to proceed with the annual meeting where stockholders would give their nod to approve key corporate decisions of the group of Pangilinan and Ongpin who had the biggest stakes.

Less than 6 months after that meeting, David’s DBP, the Ongpin group, and former Philex CEO Walter Brown jointly sold all their Philex shares to Pangilinan’s group for a fabulous price of P21 per share. To DBP, that meant a historic windfall. The bank accumulated its Philex shares from the open market for an average of only P5.06 per share. Trading the mining stock resulted in a 315% return in just over 8 months.

But David was not recalling that interrupted lunch 2 years ago because the Philex deal meant fat and fast returns for the bank. He was being asked why, a month before selling at P21 per share, DBP sold almost half of its over 100 million Philex shares to the Ongpin group at only P12.75 per share. The baffling price difference and the timing of the two deals – only 4 weeks apart – have raised critics’ brows and fanned speculations of hanky-panky, even illegal, arrangement. 

Adding fuel to the fire was how that November 2009 deal was financed: DBP granted a P510 million loan to the Ongpin group to bankroll the purchase of the bank’s Philex shares. Simply put, the buyer was able to acquire the shares from the government bank on credit. 

Why DBP agreed to part with its Philex shares in exchange for an inherently risky credit arrangement instead of outright cash has been criticized in various opinion columns published in the past months, and has been a hot topic among the banking and investment circles in Manila.

In this 2-part series, abs-cbnnews.com unveils the multi-million lending and stock trading transactions between DBP and the companies associated with Ongpin. We will also explain the context by which these controversial deals took place. 

Loan for the buyer

Even before the controversial half-a-billion loan that DBP extended to the Ongpin group in November 2009, the state-owned bank had granted several multi-million loans to companies associated with Ongpin, including Deltaventure Resources Inc. (DVRI)

DVRI, according to its incorporation papers, is mainly engaged in real estate business, but also authorized to buy and trade stocks. Its main asset are shares in mining-turned-gaming firm Philweb Corporation, which, in turn, lists DVRI as one of its minority owners.  Ongpin votes the DVRI shares in Philweb.

DVRI, which is headquartered in Makati, had a P150 million credit line with the DBP branch in Baguio City that was used for the business needs of its agricultural and trading activities in the summer capital. In April 2009, DBP renewed the fully-availed credit line, which was collateralized by DVRI’s orange orchard farm in Baguio and backed by DVRI’s pledge of its Philweb shares. 

DBP-Ongpin-Philex controversial deals detailed 1

These loans were still outstanding in November when DBP granted DVRI a second credit facility. This time, the loan was worth a whopping P510 million. It was payable in 6 months. 

The Ongpin group failed to submit several pre-loan documentary requirements to DBP, but all these became moot when DVRI paid all its loans on December 8, 2010. DBP earned about P4 million in interest income from its short and seemingly sweet loan business with DVRI in 2009. Or so they seemed.

One year after, newspaper columnists started raising concerns about the prudence  of these loan transactions, especially the second one. They cited wrongful lending practices and conspiracy among the cast of characters. Bankers, investors, good governance advocates and others were easily alarmed.

Since the transaction details have been incoherent, abs-cbnnews.com gathered publicly available and related documents, and interviewed stakeholders to piece the story together. What evolved is a trail of big risks and big rewards not for the faint-hearted. The timing of the DBP loan to DVRI, the trading of Philex shares, and key decisions made by the corporate players in the Philippines and Hong Kong all seemed synchronized.

Cash and credit

On November 4, 2009, First Pacific Co. Ltd, which is led by businessman Manuel Pangilinan, told the Hong Kong stock exchange that it is pursuing its plan  disclosed two weeks ago to raise about $277 million from a rights issue. 

In its prospectus,  the Hong Kong-based holding company said that it “intends to apply the net proceeds of the Rights Issue in pursuit of the Group’s investment strategies and, in particular, to apply part of such proceeds to expand and develop the Group’s mining strategies in the Philippines and in Southeast Asia….” At the time, Philex was the group’s only mining interest in the Philippines.

DBP-Ongpin-Philex controversial deals detailed 2

The following day, November 5, Philex, in turn, disclosed  to the Philippine Stock Exchange that Goldenmedia Corporation, another Ongpin-led firm, acquired additional 50 million shares of the mining firm. These were the same shares that were acquired from—and funded by—DBP, the seller. 

DBP’s former president David offered an explanation as to how the controversial loan transaction was hatched. It happened during a meeting  with Ongpin a few days before November 4, 2009, when they were discussing loans and other banking businesses of Alphaland Corporation, the real estate arm of Ongpin’s group of companies. David said he casually broached the idea of selling half of the bank’s 109 million Philex shares to Ongpin.  

“He knows my motive: It was almost year end… DBP should earn from trading shares,” he told abs-cbnnews.com, stressing that the Philex shares at the time had already more than doubled its average acquisition price of P5.06 per share. 

They eventually settled at P12.75 per share, the closing price of trade on November 4. David claimed that he simply thought that that price would allow DBP to recoup the P555 million it spent for all its 109 million Philex shares. (A stock dividend in 2009 increased DBP’s Philex shares to 129 million).

Since the proposed deal was only for 50 million shares, David said proceeds from succeeding sale of the remaining over 50 million more shares would just be gravy.

David said Ongpin asked for a deferred payment arrangement of the P637.5 million deal price. “I told him that I cannot lend him the entire amount since there is no way this deal will be free. So I asked for a down payment. He (Ongpin) agreed to (make a) 20% (down payment). He came up with the cash.”

DBP’s relevant credit committees and the board approved the deal in an unusually speedy manner. They approved the loan amount and structure on November 4, also the day First Pacific confirmed its plans to raise funds for Philex. 

The loan transaction was structured this way: DVRI paid DBP a down payment of P127.5 million equivalent to 20% of the Philex shares’ P637.5 million value. DBP then granted a loan of P510 million, representing the balance, to DVRI, a unit of Goldenmedia. The 50 million Philex shares, however, were not registered under DVRI, the borrower-client, but under Goldenmedia, which, in turn, pledged the same shares as loan collateral in favor of DBP. 

DBP-Ongpin-Philex controversial deals detailed 3The loan and its structure triggered these questions: Why did DBP, the seller, agree to a share sale transaction where it received credit instead of outright cash? Why was Goldenmedia added as third party in what could have just been a straight and simple loan transaction between two entities, DBP and DVRI? Was the bank unduly exposed to any risk? Did DBP violate any banking rule or favor a borrower to the detriment of the bank’s depositors and the taxpayers?

The banking business in the country falls under the purview of the Bangko Sentral ng Pilipinas, which has rules and guidelines to ensure that banks protect the money entrusted to them by the public. In the case of DBP, a state-owned bank, funds do not only come from depositors but also taxpayers.

In its rule book for banks, BSP said that, regardless of transaction amount, banks should not engage in suspicious transactions. These occur when client is not properly identified; the amount involved is not commensurate with the business or financial capacity of the client, and when there is any circumstance relating to the transaction which is observed to deviate from the profile of the client and/or the client’s past transactions with the covered institution.

Cast of characters in the DBP-Ongpin-Philex deals

MANILA, Philippines – The 3 personalities around the controversial multi-million loan transaction in 2009 involving a state-owned bank and a private entity are no strangers to each other.DBP-Ongpin-Philex controversial deals detailed 4
Reynaldo David, former president of Development Bank of the Philippines (DBP), and businessmen Roberto Ongpin and Manny Pangilinan, have crossed paths in the past.

David, a veteran banker who has served major financial institutions here and abroad, recalled meeting Ongpin for the first time in the early 1980’s. David was then an executive of Interbank, a private bank controlled by the Disini family who had financial and legal problems that led the Marcos government to bail out and take over the bank. 

David recalled when Ongpin, then the trade minister of Marcos, visited Interbank. “I was in awe. Siya pala ang legendary Bobby Ongpin,” he shared. Ongpin already had a reputation for being an astute businessman.

After Marcos was forcibly removed from power in 1986 and Ongpin went on a self-exile, David and Ongpin would bump into each other as they both moved around similar social and professional circles. “It’s a small world,” David said.
DBP-Ongpin-Philex controversial deals detailed 5
As for Pangilinan, David said he knew him from his days as investment banker in Hong Kong where First Pacific Investments is based. Pangilinan heads the conglomerate which has assets in Asia controlled by the Salim family of Indonesia.

David said he was not privy to the deal between Ongpin and Pangilinan that priced the Philex shares at an all-time high of P21 each last December 2009. “Iba  sya (Ongpin) mag-isip. Malalim,” he said of the former Marcos crony.

But whatever was the deal between Ongpin and Pangilinan, David said he wanted to make sure that DBP would be part of it. “That was our opportunity to unload and maximize our profits,” he told abs-cbnnews.com in a recent interview.

DBP earned a hefty P1.3 billion from trading Philex shares in 2009.

Meantime, Ongpin and Pangilinan have done business together over the past years. Ongpin has sold stakes in some of the companies he has acquired in the past to Philippine companies controlled by First Pacific.

In Philweb, for example, ePLDT, the data and outsourcing arm of telecommunications giant Philippine Long Distance Telephone Co (PLDT), which Pangilinan chairs, acquired a 26.74% stake in Philweb Corporation, the gaming company where Ongpin is chairman.DBP-Ongpin-Philex controversial deals detailed 6
Philweb was formerly South Sea Oil Resources, a dormant but listed mining firm that Ongpin acquired in the 1990’s. Gaming was then being considered as an additional offering to wireless subscribers of PLDT. Mobile gaming was once thought as a potential “killer application” that could help PLDT keep its subscribers from transferring to another operator.

Ongpin has also sold CURE to the PLDT group. CURE, a little-known telecommunications company that won one of the few 3G licenses from the government, eventually became the PLDT group’s entity to launch Red Mobile, which offers low-cost broad-band services.

In 2009, Ongpin also sold its minority 30% stake, together with the Cojuangco group, in ABC Development Corp to Mediaquest, the corporate entity that the Pangilinan-led group taps for its foray into the media industry. TV5, the network’s brand name, is the third largest broadcast group in the country. – By Lala Rimando

Meantime, the Anti-Graft and Corrupt Practices Act holds public officers criminally liable for “causing any undue injury to any party… or giving any private party any unwarranted benefits, advantage or preference in the discharge of his official administrative… functions.” The board members and top executives of DBP, being a state-owned bank, are political appointees. 

Pledged shares

In the P510 million loan to DVRI, DBP partially covered its risks by accepting the pledged Philex shares from Goldenmedia, a third party that had no credit history with DBP unlike DVRI, which was already an existing DBP loan client.

Abs-cbnnews.com noted that, at the time, Goldenmedia was one of the 3 Ongpin-related entities that already owned Philex shares. Goldenmedia then owned 22 million Philex shares and could just tally up the newly acquired 50 million shares from DBP.

The BSP considers loans against pledged shares of a blue-chip company listed in the Philippine Stock Exchange as a “safe” transaction if the value of the pledged stocks is equivalent to 200% of the loan. For example, for the bank and the BSP to consider the P510 million as a fully secured loan to DVRI, the value of the pledged stocks must be P1.02 billion. This 2:1 ratio supposedly provides the necessary cushion against volatile prices and inherently risky nature of stocks. 

When Goldenmedia pledged the entire 50 million Philex shares, it meant DBP allowed the loan to the Ongpin group to be secured by only 80%. Instead of 2:1, the ratio was down to 1.25:1.

David said the bank was still comfortable with how the loan was collateralized since the pledged Philex shares remained in the custody of the bank’s capital markets subsidiary.

“If DVRI defaults, what does DBP get? We forfeit the P120 [million down payment], we get back the (50 million) Philex shares, and go after the orange orchard [of DVRI and] the mortgaged assets of Alphaland (another Ongpin-led firm with DBP loans),” the former bank president said.

“We had to make a position fast because we didn’t know how the share price would move. There must be a stop date,” he added.  
A check of the incorporation papers of Goldenmedia filed at the SEC also showed that it was not allowed to act as a third-party mortgagor or pledging entity. These could have posed problems if DVRI failed to pay its P510 million loan. The DBP board reportedly waived the requirement for Goldenmedia to amend its Articles of Incorporation to authorize it to pledge its own assets in behalf of another company. 

Rushed and revoked

Mitigating risks through proper collateral guarantees, however, were not what made this deal beyond the usual. After all, it is the bank’s call if a client deserves a partially or fully secured credit.

However, findings of an unauthorized third party and the questionable financial capacity and corporate personalities of the borrower showed that the Ongpin group failed to meet the basic criteria for screening loan clients mandated by the BSP.

These failures could be attributed to the bank being lax with compelling DVRI to comply with the different requirements. The second loan to DVRI was also granted in haste.

After the early November meeting between David and Ongpin, it took DBP only a couple of days to process the P510 million loan. It usually takes at least 1 to 2 months for banks to process loans to give ample time for due diligence work on the borrower. BSP’s guidelines on suspicious transactions  require banks to ensure the borrower’s capacity to pay back the loan out of the normal course of business activity. 

DVRI’s credit records, which were urgently couriered from Baguio, did not even contain an updated report on DVRI’s credit and financial standing, a standard procedure among prudent bankers to know if the borrower has been paying its other creditors and suppliers on time.

DVRI’s credit records in Baguio also reportedly did not include its latest audited financial statements. It has been reported that DVRI only earned around P311,000 in 2007, and incurred a net loss of almost P100,000 in 2008 due to decline in the value of its Philweb shares. These interim financial reports showed that DVRI could not even afford the P16 million total interest charges for that new half a billion-peso loan throughout the approved 6-month loan period.

When abs-cbnnews.com checked DVRI’s submissions to the Securities and Exchange Commission to independently confirm DVRI’s financial performance, the regulators’ records showed that DVRI last submitted an audited financial report way back in 1996. That year, it earned only P106,334 from its investments and from a property called “Green Mountain Farm,”   which, according to records of a labor dispute, refers to a cockfighting-related property in Benguet province.

Aside from delayed submissions of audited financial records to the SEC and to DBP, we learned that the corporate license of DVRI had been revoked. It failed to submit the required general information sheet (GIS), which discloses, among others, the owners and their respective stock holdings and the key management officers. Both are decided upon during the annual stockholders meeting, which DVRI had not been holding. SEC automatically revokes corporate licenses if the company has not been operating for 5 consecutive years.

Abs-cbnnews.com noted, however, that DVRI submitted to the SEC its corporate information for year 2008. DBP renewed DVRI’s first credit facility and granted the controversial P510 million loan the following year.

The 2008 corporate information sheet listed Josephine Manalo, a long-time assistant to Ongpin as main stockholder and president. Manalo was also one the incorporators of DVRI in 1977 and holds key positions and major shareholdings in other Ongpin-led firms, such as Tidemark Holdings, Boerstar Corp, and Goldenmedia. These 3 companies have or had stakes in Philex Mining or its subsidiaries. On record, Manalo also holds major stakes and positions in listed firms Alphaland Corp, Philweb Corp, and Atok Big Wedge Corp.

Bigger picture
DBP’s David acknowledged that there may have been lapses in the credit checks on the Ongpin-led firms, but stressed that the bank also considered the bigger picture. To him, DVRI and Goldenmedia were mere small parts of a grander strategy of the bank to maximize its earning potentials. David was the main cheerleader of the DBP-DVRI-Goldenmedia deal.

“Our critics question the loan. But you must have a greater, larger view. This is not just an account that’s obscure or whatever. This is a group relationship that we’ve had. And it’s a very profitable relationship,” he explained.

David was referring to real estate firm Alphaland and its main principal, Roberto Ongpin. DBP is one of the main creditor and depository banks of Alphaland, according to David. In two of the real estate firm’s biggest projects in Makati City – Alphaland Southgate Tower, an office and mall complex strategically located along Edsa, the metropolis’ main thoroughfare, and Alphaland Makati Place, a high-end residential and mall complex in the outskirts of the business district – DBP was always part of the consortium of banks that raised P1.4 billion and P1.7 billion syndicated loans for the respective projects. 

DBP was also the underwriter of the corporate debt notes of Petron, the country’s largest oil refiner and retailer, and lists Ongpin as one of its board members.

David was proud that, amid the competitive commercial banking landscape, DBP edged out the country’s biggest universal banks and investment houses in clinching the loan and equity businesses of Alphaland and other companies that Ongpin controls. The a state-owned development bank has been allowed to engage in commercial and investment banking activities in the 1990’s.

While it is a mutually beneficial relationship, David said DBP still followed banking rules to the letter. He emphasized that DBP has been designated as the trustee of the mortgage documents on Alphaland’s glass-encased, 20-story building in EDSA, and that the pledged assets of the real estate firm were more than enough to cover DVRI’s if the latter fails to settle both its loans totaling P660 million. 

“To my mind, we were covered,” stressed David. “There could be exceptions, such as the lack of financials or whatever, but we disclosed these to the bank’s approving bodies. Even the board gave its blessing for this transaction…. We gave them the greater view, we told them about our overall relationship with the Ongpin group. The board said, ‘It’s fine’.”

When asked why the bank accepted a credit payment instead of cash for the Philex shares, he replied: “At the end of the day, monetization na lang of the credit. And you (DBP) know you’ll be paid (by Ongpin group).”

DBP-Ongpin-Philex controversial deals detailed 7Patricia Sto. Tomas, a long-time government official who was the chairperson of the DBP at the time of these transactions, vaguely remembers the now controversial loans made to DVRI almost 2 years ago. She confirmed that DBP had a satisfactory and profitable experience with the Ongpin group.

In an interview, she admitted that concerns about the controversial loans have reached her, too. “Someone called me about it. But since I’m doing consulting work (now) that is not into banking, it didn’t interest me all that much.”

Sto. Tomas pointed out to abs-cbnnews.com, however, that the bank tried to managed loan-related risks. In an email response to abs-cbnnews.com’s follow-up questions, she shared that “the loans (to DVRI) were covered by shares of stocks (either Philweb or Philex or both) which we could have sold in case of a default on the loan. I remember this in particular because I am not too big a risk-taker myself and I always ask if there is sufficient cushion for the bank.”

She added: “My primary interest in the bank was how it can assist in the country's development.  Early enough, I realized that developmental funding proceeds from profits generated from commercial lending. This means, among others, being judicious  in who we lend to and making sure that we are sufficiently covered for what we lend… I am pleased with the depth and breadth of our engagement in social issues as an offshoot of our commercial operations.”

Under her watch, DBP had several social and development efforts ranging from scholarship and forestry programs, OFW repatriation efforts, and the clean-up of Pasig River.

“Lending in particular is a risky operation. I am particularly proud to have worked with a board and management which knew how to take risks with the requisite prudence and due diligence," she said.

Philippine Star columnist Boo Chanco is not convinced. He wrote  in his March column: “My concern was more in terms of whether it is the business of a development bank funded by the taxpayers to lend money to Arroyo administration cronies to speculate in the stock market. The fact that the bank did not lose money and in fact made oodles of money on the transaction is beside the point.”

The “crony” Chanco was referring to was Ongpin, who was close to the husband of former President Gloria Arroyo. There have been persistent but unverified talk in Manila that Ongpin fronts for the investments of the Arroyos placed with London-based Ashmore Group, which has several big-ticket investments in the Philippines, including Petron and diversifying conglomerate San Miguel Corporation.

In a previous interview with ANC, Ongpin said his acquisitions are aimed at making money and contributing to nation building.

"It's not just the opportunity. You have to evaluate the opportunity, make sure it fits in with your overall objectives, make sure it contributes to the development and progress of this country, which we all love very much. We want it to move forward," Ongpin said.

Good governance

The analysis of how DBP granted loans to DVRI and the DBP’s highly profitable buy-and-sell of its Philex shares highlights how banks are naturally more risk averse than traders. 

DBP’s approach of looking at the overall relationship of the bank with the Ongpin group was in keeping with BSP’s mandate for banks not to breach the Single Borrowers’ Limit, which represents 25% of the bank’s capital. However, while banks have to aggregate the outstanding credit facilities of related companies and borrowers, each borrower within that group is rated separately based on the bank’s risk exposure.

Thus, while DBP has shrugged off even the basic requirements from DVRI and Goldenmedia in support of its overall strategy of maximizing trading profits on Philex shares, this decision itself has a cost. According to a board member of one of the top 3 privately held universal banks in the country, DBP must have been penalized for the risks it took in 2009.

DBP-Ongpin-Philex controversial deals detailed 8The veteran banker noted that the BSP has required banks to follow the international banking practice of rating the risks attributed to each borrower-client, even if that client is part of a group. If a borrower is rated as a “high risk” client, the bank has to increase its capital tucked away at the BSP to cover the possibility of default by that client. Banks generally prefer to set aside minimal capital reserves so it could deploy more funds for profitable activities, such as loans and investments.

Since the DBP board had been made aware of these risks and still approved the loans to the Ongpin group, the cost of additional capital reserves must have been factored in, he said .

A BSP official acknowledged that the financial success of the transaction between DBP and the Ongpin group did not give them a trigger to conduct an investigation. “If there are no losses or injury, it is not for the regulators to come in,” BSP deputy governor Nestor Espenilla told abs-cbnnews.com.

He said DBP’s board must have understood the risks—and the cost of the DVRI-related risks— involved in lending to DVRI, and took a position that proved to be profitable. 

“At the end of the day, it’s good governance,” he said, adding that banks have their own internal risk standards by which loans are screened against. Companies who observe good corporate governance vow to protect the long-term interests of their shareholders, especially the minority, who generally do not have a voice in key business decisions and strategies.

The board of directors are tasked to ensure that these internal standards are followed, but are aware of the repercussions to the bank and to their professional careers in case of exceptions.

Calculated risks?

Despite the risks and exceptions to internal risk standards, Lady Luck was on DBP’s side. The price of Philex shares, which was the basis of the collateral cover, hovered around P11 after the loan was granted in November 5, then soared day after day after day. By end-November, the share prices were touching P18 per share, a record high.

Since the Ongpin group paid a 20% down payment, David said the bank’s capital markets group computed that the Philex shares had to fall to about P9 per share level for the bank to worry about the pledged collateral.

DBP-Ongpin-Philex controversial deals detailed 9By December 2—less than a month after DBP sold half of its total Philex shareholdings at P12.75— Philex and Hong Kong-based First Pacific announced that the Ongpin group sold their entire Philex shares for a whopping P21 per share.

David admitted that DBP piggy-backed with Ongpin so the bank could also sell its remaining almost 60 million Philex shares to the Pangilinan-led First Pacific group at P21 per share.

“I signed because I wanted DBP to be part of that transaction. We don’t want to be left behind. If we were left behind, then we’re at the mercy of the market. The market never touched P21 (per share), only around P18 or P19,” he said. 

He stressed that the strategy may be a “very shrewd move” but it helped maximize the trading profits of the bank. “The P2 difference (for over half a million more Philex shares of DBP) translated to P100 million plus-plus additional trading gains for DBP. Imagine how much development work we were able to fund with P100 million more.”

While the loans fetched around P4 million in interest income, it was the trading transactions on the Philex shares that brought the windfall. All in all, DBP earned over P1.3 billion from trading gains. It pushed net profits to P6 billion that year,  a record high.  The development bank considered 2009 as its banner year. Half of DBP’s profits were remitted to the national treasury.

(Part two of this series will explain the other entities and personalities both in business and government involved in the changes in the control of Philex Mining Corp.)