Anatomy of a ‘behest’ loan

MANILA, Philippines – When a controversial loan between a state-owned bank and an equally controversial multi-billionaire triggered a Senate investigation, a fundamental question was raised: What makes a loan “behest”?

Early into the October 7, 2011 hearing of the Senate blue ribbon committee on the P660 million loans extended to the group of businessman Roberto Ongpin in 2009, Sen. Serge Osmena asked current and former officials of Development Bank of the Philippines this question.

The answers were mixed.

Solicitor General Anselmo Cadiz cited a 2007 Supreme Court decision (PCGG vs. Desierto et al) that enumerated eight elements that make a loan unlawful.

The eight elements of a behest loan are:

• loan is undercollateralized
• borrower is undercapitalized
• direct/indirect endorsement by high government officials
• cronies own or control the borrowers
• loan was used to other purposes  
• use of corporate layering
• funded project is not feasible
• extraordinary speed in loan release

Cadiz stressed that a loan is behest if any two of these criteria are met.

However, some of the former bank directors, including former bank president Reynaldo David, had a different definition.

Common among their definitions were what a behest loan is not: interest and principal payments are updated and that the entire loan is paid in full.

David cited Executive Order 432 issued in 2005 during the Arroyo administration that mentioned that non-performing and defaulted loans are considered behest.

For over four hours, the senators and the former and current officials discussed what made the loans to Ongpin unlawful or not.

All in a day

Sen. Osmena noted how three different collegial bodies in DBP–the basic credit committee, executive credit committee and board of directors–all approved the loan to Ongpin in one day: November 4, 2009.

Banks usually take at least a month to approve a loan for typical borrowers.

Ex-president David admitted that even DBP does not usually approve a loan that quick. “This is the first time,” he told the senators.

David, however, stressed that since the loan would be used to purchase shares of Philex Mining, a publicly listed company controlled by businessman Manuel Pangilinan, the bank officials saw it fit to act fast.

DBP’s loan was initially considered irregular since the borrower, Ongpin-led Delta Ventures Resources Inc (DVRI), used the proceeds to purchase the Philex shares of DBP, the lender.

A month after–on December 2009–Ongpin included those DBP-owned Philex shares when he sold all his stocks in the mining firm to the group of Pangilinan.

Ongpin’s group obtained the Philex shares from DBP at P12 per share, then sold them at P21

Collateral cover

Aside from the quick approval process, the senators also asked if the state-owned bank was exposed to other risks during the duration of the loans.

David’s predecessor, current president Francisco del Rosario, cited a “four-day gap” in December 2009.

He said that between December 4 and 8, DBP did not have the Philex shares pledged by DVRI to cover the loan.

Ongpin’s group asked DBP to release the pledged shares on December 4 so it could facilitate the transfer to its buyer, a unit of Pangilinan’s group.

David belied insinuations that the bank was put at risk during that period since the bank released the Philex shares to DBP Daiwa, a 20%-owned sister company.

On December 8, after the sale between the groups of Ongpin and Pangilinan was completed, the DBP loan was fully paid.

Philex, Philweb

David also stressed that there were two loans with shared collateral assets.

The first loan, worth P150 million approved in March 2009, was covered by a pledge on DVRI-owned shares in online and technology firm PhilWeb.  

The second loan, worth P510 million approved in November, was collateralized by Philex Mining shares based on an 80% loan-to-collateral ratio.

When questioned why DBP agreed to accept a collateral ratio lower than the central bank-prescribed full coverage of 200%, David said the bank was not put at risk.

He said DVRI signed a pledge on its Philweb shares to cover not only the first loan but all outstanding borrowings of DVRI from the DBP.

DBP chairman Jose Nunez contradicted this, citing an “offering memo,” an internal document used in processing the loan approval. It specified that only Philex shares were considered as the cover for the second half-a-billion worth of loan.

David also mentioned that DBP, under its new leaders, held on to the Philweb shares until August 2011, way after DVRI settled its loans.

Senators asked the officials to present documents in the next hearing to substantiate each group’s position.

Blue-chip stocks

Del Rosario said a collateral is not enough basis for a bank to determine if the loan is risky or not.

He noted that DVRI may not have enough cash flow from normal course of its business, but was greatly dependent on selling assets, including shares of publicly listed firms.

For its first loan, DVRI was supposed to use the P150 million proceeds for its agricultural ventures, but later changed the purpose of the loan to its Philweb-related investments.

David said accepting shares of blue-chip stocks as collateral for loans is like accepting cash deposits as loan cover from a borrower.  

Del Rosario, however, considered shares of listed firms as “speculative” assets. “If the price (of the shares) collapsed, we are left holding the bag,” he said.

David said the shares it accepted from Ongpin are considered blue-chip stocks.

In an interview, Osmena said Philex at the time of the loan transaction, was not considered a blue-chip stock.

Aside from Philex, David said DBP also traded shares of oil refiner and retailer Petron Corp and power firm Manila Electric Company (Meralco).

Osmena noted that Ongpin was also involved in these two companies.

David explained that DBP acquired shares in Petron since they were anticipating that its share price would go up after it was privatized in 2008.

As for Meralco, David said DBP sold its shares to Global 5000, a company that Osmena described as “another Ongpin company.”

Non-existent borrower?

Senators also questioned why DBP entertained DVRI as a borrower when its corporate license was once revoked, insinuating that the bank did not do its homework.  

Sen. Panfilo Lacson cited the records of DVRI submitted at the Securities and Exchange Regulation. DVRI was registered in January 27, 1977 but its license was revoked in 2007 since it did not submit corporate information for five years.

Lacson asked David why DBP accepted DVRI’s financial statements in 2007 when it was deliberating on the loan.

“It (DVRI) was non-existent at the time they made that financial statement,” the senator quipped.

David explained that DVRI re-registered in 2008, a year before DBP extended the two loans in 2009.

The blue ribbon committee will resume its probe on the DBP-Ongpin deal on October 14, 2011. –Move.PH