Part 1
Much has been said about the last 30 years. Especially when looking in
hindsight on all that has happened after EDSA 1986. Everything is clearer and
20/20 in hindsight. But let us make an effort to really make it clear. There
has been economic growth but it is claimed that it is not “inclusive”. The
answer is yes, that it has not been inclusive when considering that 60% of
those who live in poverty belong in the rural areas where agriculture is the
main industry. But it is also our responsibility to look further than 30 years.
What are the yokes that continue to burden the agricultural sector and more
importantly what are the effects that continue to pose as real dangers to the
economy until today.
More than 30 years ago, the real drivers of Philippine agriculture were
2 industries. The sugar industry and the coconut industry, the sugar industry
is considered comatose and the coconut industry is not only on its death throes
but also hangs as a Damocles Sword over the head of the Philippine economy.
Here is why.
The coco-levy fund has been part of the headlines during the past week
due to the stand of a presidential candidate with regards to its disposition
but also has undercurrents because of the main supporter of that candidate.
Far – reaching consequences
The way this issue is
resolved may have unintended and far – reaching consequences on the value of
other coco levy assets apart from the San Miguel preferred shares, the health
and stability of the entire financial system, the finances of the government
and the Philippine Deposit Insurance Corp. (PDIC) and the sustainability of the
recent growth in the economy.
UCPB
and Cocolife each claim 11% ownership in the block of San Miguel preferred
shares which were the subject of the January 2012 ruling. UCPB and Cocolife
themselves are coco levy assets whose ownership government claims – 95% in the case of UCPB and 100% in
the case of Cocolife.
The
relationship between the San Miguel shares, UCPB, Cocolife, the ongoing
litigation on these assets, PDIC, government action on these assets can have on
the financial system and economy is complex.
However,
because the impact of government actions on these assets is so far – reaching,
this complexity must be taken into account in deciding what action to take.
Two options
Two potential, mutually
exclusive options, which would maintain the current (pre – Supreme Court
ruling) financial position of UCPB and Cocolife, while to a lesser extent meeting
other government objectives.
The
first involves maintaining the status quo and recognizing UCPB and Cocolife’s
proprietary claims over the San Miguel preferred shares.
The
second does not recognize these claims and involves a government entity
investing new equity into both UCPB and Cocolife, equivalent in value to their
respective claims on the San Miguel preferred shares.
Both
options will require further legal study, and neither is without its risks.
This also describes the expected cost to government if, due to
circumstances beyond its control, government were to have to provide
extraordinary financial assistance to UCPB for the latter to retain depositor
confidence.
Background
1.
There is no single entity, which is the owner of
record of all of the various assets often referred to as coco levy assets. From
the inception of the coco levy in the 1970s, various institutions were created
to use the coco levy funds to acquire various assets, which in turn also used
coco levy funds acquire other assets. Thus, there are complex and interlocking ownership
relationships between these assets.
2.
There are two layers of companies through which
the beneficial ownership of the San Miguel preferred shares is held the six oil
mills and 14 holding companies.
a.
100% of the equity of the six oil mills is held
by three entities:
i.
78% by UCPB not in it own capacity but in a
trustee capacity, as Administrator for the Coconut Industry Investment Fund (a
government institution)
ii.
11% by UCPB in its own capacity
iii.
11% by Cocolife in its own capacity.
b.
The six oil mills in turn own 100% of the equity
of the fourteen holding companies.
c.
The 14 holding companies in turn, collectively
own the San Miguel preferred shares.
3.
UCPB and Cocolife both claim that their 11%
beneficial ownership of the oil mills (and thus, the holding companies and San
Miguel preferred shares) was acquired through the use of their own corporate
funds, not through coco levy funds.
The share certificates in the oil
mills were issued in the name of UCPB and Cocolife.
In UCPB’s case, share certificates
for 78% of the ownership of the oil mills issued in the name of “UCPB as
Administrator of the CIIF” and 11% in the name of “UCPB as Universal Bank” to distinguish between the
two different capacities in which it holds shares in the oil mills.
For reasons we do not know,
neither UCPB nor Cocolife, nor PCGG or any other government agency, took legal
steps to protect Sandigangbayan’s ruling on the ownership of the then San Miguel
common shares already raised the possibility that these assets may not be
theirs in their individual capacities.
4.
Government claims ownership, and exercises ownership
rights (because of their sequestration by PCGG) of about 91% of the shares in
UCPB.
Government’s claims, however, are
spread over different blocks of shares, with several registered owners, and the
subject of various court cases in different stages of adjudication.
a.
68% has been adjudicated in favour of
government; in the same January 2012 Supreme Court ruling as the one on the San
Miguel preferred shares. This 68% can be further broken down into:
i.
26% held in the name of individual farmers
ii. 42% held in the name of the six oil mills (the
same ones through which the San Miguel preferred shares are held).
b.
9% held in the name of Eduardo Cojuangco, Jr. and
associated companies.
c.
14% held in the name of various other individuals
and companies, including Cocolife.
Government does
not claim ownership of 9% of privately owned shares in UCPB.
5.
Government claims ownership of 100% of Cocolife.
These shares are not sequestered, and have not yet been adjudicated in favour of
government.
As with UCPB, government’s claims
are spread over different blocks of shares, with different registered owners:
a. 47% held in the name of UCPB not in its own
capacity but in a truste4e capacity, as Administrator of the CIIF – exactly the
same as in the case of the oil mills and San Miguel preferred shares described
above. Government votes these shares.
b.
8% in the name of individual farmers.
c.
45% in the name of various other individuals and
companies.
6.
Government claims ownership of UCPB and Cocolife
for exactly the same reason, and in exactly the same way, as it claims
ownership over the oil mills, holding companies, and San Miguel preferred
shares: these are coco levy assets.
Government
claim that 91% of the shares in UCPB, and 100% of the shares in Cocolife issued
in the same of the entities mentioned in previous paragraphs above, were
acquired using coco levy funds.
UCPB, Cocolife must
remain viable
Thus, it is government’s responsibility to ensure that
UCPB and Cocolife remain financially viable, and that their value is maximized
so as to raise as much proceeds from their eventual privatization as possible,
in support of the purposes identified by the Task Force on the Coco Levy.
Furthermore, as the entity, which controls UCPB and
Cocolife in practice, through its appointment of both institutions’ boards of
directors, governments is accountable for the financial performance of both
entities.
7.
UCPB is in a unique and difficult financial
situation.
This
situation came about under government’s watch, as government has exercised
control over UCPB since 1986.
UCPB given P12B by
PDIC while gov’t deposited P30B
Without the extraordinary
measures put in place by the PDIC, BSP, and the national government itself,
most recently in 2009, UCPB would cease to operate. These measures include:
a.
PDIC financial support of P12 billion, which the
bank must either repay over time or convert into preferred shares and later,
common shares.
b.
Government deposits of P30 billion,
c.
Special regulatory treatment by the BSP, in
effect:
i.
Allowing the PDIC financial support to be
counted as capital for the purposes of complying with regulatory requirements.
ii.
Allowing UCPB to temporarily not recognize about
P28 billion in losses, again so that UCPB would appear to comply with
regulatory requirements.
iii.
Exempting UCPB from certain financial penalties
for non – compliance with certain regulatory requirements.
8. These measures have been put in place, at
significant financial risk particularly to PDIC and the government, and
contrary to BSP’s usual practice, because UCPB is a large financial institution
whose closure would have negative systematic implications on the health and
stability of the financial system as well as the overall economy.
As of 2012, UCPB has 183 branches and over 500,000
depositors. It has the ninth largest amount of deposits, and twelfth largest
amount of assets among banks in the Philippines.. Of its P157 billion in
deposits, P37.6 billion is guaranteed by PDIC.
Implications of the Supreme Court ruling
9. If the San Miguel preferred shares which UCPB
claims ownership of in its proprietary capacity were to be removed from its
balance sheet without compensation – as is the implication of one of the
options presented by the Task Force – this would result in UCPB’s capital
adequacy ratio falling below required levels, and would be grounds for the BSP
to place the bank under prompt corrective action, receivership and eventual
closure.
Apart from the systematic risk this would pose to the
financial system and economy at large, UCPB’s closure could have the following
financial consequences:
a.
PDIC would have to spend up to P37.6 billion to
pay out guaranteed deposits (deposits below P500, 000).
b.
PDIC may not recover much, or all, of the P12
billion in financial supports it extended to UCPB.
c.
The recovery by government of the P30 billion in
deposits in UCPB would be uncertain, and at any rate, would take years.
d.
The recovery by private depositors of deposits
above the P500, 000 guarantee limit would be uncertain, and at any rate, would
take years. We estimate this amount at P88 billion.
UCPB future
10.
Even before the Supreme Court ruling of January
2012, it was government’s plan to eventually privatize UCPB.
The
bank’s weak financial positions, and the unresolved ownership status of its
shares, have been the main obstacles to its being privatized.
The
January 2012 Supreme Court ruling, which affirmed an earlier Sandiganbayan
ruling awarding ownership of 65% of UCPB’s shares to the government, is a step
forward in enabling government to privatize the bank, but it is not yet final
and executory.
However,
it is all but certain that the PDIC financial support will eventually be
converted into common shares, which will account for 89% of UCPB’s common
shares.
Gov’t ownership in UCPB will be diluted
What
is now a 100% stake in UCPB will thus be diluted to an 11% stake in UCPB.
We do not yet know
what this will be worth, and whether PDIC will be able to recover its P12
billion in its entirety, much less what the 95% stake claimed by government in
the common shares of UCPB will be worth when it becomes a 10.5% stake.
However, if UCPB
is closed before this can happen, what is certain is that the 95% stake claimed
by government in the current common shares of UCPB will be worth nothing, and
PDIC may not recover much on its P12 billion financial support.
It is important
to acknowledge, however, that the value of the shares in UCPB claimed by
government will almost certainly be, under even the most optimistic scenario,
less than the value of the 11% share claimed by UCPB in the San Miguel
preferred shares.
Cocolife financially healthy
11.
Unlike UCPB, Cocolife is financially healthy, by
the 11% of the San Miguel preferred shares it claims ownership of account for
nearly half of its assets (as of end 2010).
If these shares were
to be removed from its balance sheet without compensation – as is the
implication of one of the options presented by the Task Force – this would
result in Cocolife’s equity falling below required levels, and may be grounds
for the Insurance Commission to revoke or not renew its license.
Cocolife has the 8th
highest premium income of all life insurance companies, and is the country’s
largest group insurance provider.
Its closure would affect
2.7 million policyholders, the vast majority of them individuals, including an
estimated 480, 000 farmers, and could have systematic implications to
confidence and risk in the insurance industry.
12.
In determining its response to the January 2012
Supreme Court ruling, as it relates to UCPB, the government must balance
several goals, some of which are contradictory.
a. As
an overarching goal, to maintain confidence in the stability of the banking
system. In specific terms, to at least maintain UCPB’s financial position as it
was prior to the Supreme Court ruling – in particular its capital adequacy
ratio should be at least 10% in compliance with BSP, and thus minimize the risk
of depositors losing confidence in the bank.
b.To
protect the government’s financial exposure to UCPB:
i.
To ensure the safety of the P30 billion in
government deposits into the bank.
ii.
To maximize the recovery of PDIC’s P12 billion
capital notes in the bank.
c. To
establish government’s claims, on behalf of the coconut farmers, on the entire
block of San Miguel preferred shares held by the six oil mills and 14 holding
companies , including the 11% of these which UCPB claims to own in its
proprietary capacity and not in trust for the coconut farmers.
13. Government’s
goals, as the Supreme Court ruling relates to Cocolife, are similar:
a. To
maintain confidence in the stability of the insurance industry. In specific
terms, to at least maintain Cocolife’s financial position as it was prior to
the Supreme Court ruling.
In particular, its margin of
solvency should be at least P23.4 billion (as of end 2010), and its equity at
least P250 million, in compliance with Insurance Commission regulations.
This will avoid Cocolife being
subject to adverse regulatory action by the insurance commission, and thus
minimize the risk of policyholders losing confidence in the company.
b. To establish government’s claims, on behalf of
the coconut farmers, on the entire block of San Miguel preferred shares held by
the six oil mills and 14 holding companies, including the 11% of these which
UCPB claims to own in its proprietary capacity and not in trust for the coconut
farmers.
Next Issue: Options
Source: Department of Finance Documents
