Tetangco halts sale of hybrid-debt instruments

By Jun Vallecera, Business Mirror

Posted at Oct 25 2010 01:19 AM | Updated as of Oct 25 2010 09:19 AM

MANILA, Philippines - Regulators issued on Friday a moratorium against any more new sale of hybrid-debt instruments for purposes of increasing bank capital.

The moratorium, which takes effect immediately, applies on the sale of so-called hybrid tier-one and tier-two capital that local banks have been using both as a means to raise their capital adequacy ratio and as a boost to their lending, and therefore their earnings, capacity.

“The moratorium is on BSP [Bangko Sentral ng Pilipinas] approvals of debt instruments meant to be qualified as either hybrid tier 1 or tier 2 capital. This takes into account possible changes in the composition of capital under Basle 3,” BSP Governor Armando Tetangco Jr. told reporters on Friday.

“No moratorium on common equity qualifying as core tier 1. Other debt instruments not for consideration as tier 1 or tier 2 can also go ahead in accordance with existing rules,” he quickly added.

The moratorium highlights the regulatory preference for common or ordinary equity coming out of bank shareholder pockets rather than from other sources such as selling debt notes to fortify capital.

The policy intent was for the banks to rely more on tier 1 or equity capital from its own shareholders to beef up their capital base instead of selling hybrid tier-1 or tier-2 notes that prior to the moratorium also qualified as forming part of capital for the banks.

Regulations require banks to maintain a capital level at least 10 times the size of bank assets at risk, including loans.

In the past, banks resorted to selling tier-2 notes and hybrid other forms to raise funds for capital purposes because this allowed shareholders to raise the money they need without diluting their equity shareholdings.

Selling equity shares would generate money for capital, but has the impact of diminishing their equity representation.

Hybrid tier-1 and tier-2 notes, however, would also generate new money for capital purposes but without diminishing shareholder equity, and this explains the banks’ collective preference for these instruments to boost capital adequacy to the minimum 10% level the BSP requires.

Hybrid tier 1 is structured as perpetual preferred stock and perpetual unsecured subordinated debt.

Tier-2 notes come in the form of unsecured subordinated debt.

Under the guidelines, bank-capital accounts not meeting the tight Basle 3 standards may be phased out and withdrawn over a 10-year period if sold before Sept. 12, 2010. Those sold after this date will not be eligible for phase out and will not form part of bank capital.

“To avoid the unwarranted uncertainty with the adoption of the Basle 3 reform package en toto, a moratorium on approvals of hybrid tier 1 and tier 2 and/or other redeemable capital instruments is hereby imposed effective immediately. The moratorium shall be in effect until Dec. 31, 2010 to allow for the formulation of revised capital definitions applicable to banks and other financial institutions.