(First of Two Parts)
President Aquino’s administration in 2011 attempted to tighten the screws on the country’s biggest industrial conglomerate, San Miguel Corp.
This was to have been through a move by the Bangko Sentral ng Pilipinas’ bank supervisors that would question the group’s financial viability and trigger a credit crunch on it, confidential documents from the BSP show.
Partly because of this BSP plotting, the assessment of the International Monetary Fund on the country’s economy was affected negatively. Because of the misleading, even false data and analysis the BSP provided it, the IMF in its April 2013 staff report concluded that one of the risks the economy faced was a default by “a major conglomerate” which it did not identify, but which obviously referred to SMC.
A BSP source claimed that the plotters’ success in getting the recent top-level IMF assessment to include a warning on the danger of the conglomerate’s default was a veiled threat to SMC that government can pursue its planned shakedown in 2011.
The move to investigate SMC’s loan situation was led by Nestor A. Espenilla, the BSP Deputy Governor for Supervision and Examination Sector (SES), the unit overseeing banks and financial institutions. It was also Espenilla when he was acting chairman of the BSP-led Anti Money Laundering Council who ordered the freezing of billionaire businessman Roberto Ongpin’s bank accounts, for which Ongpin filed a graft charge against him on grounds of unjust harassment.
I sent a text message Saturday to BSP governor Amando Tetangco’s and its Investor Relations Office chief Claro Fernandez’ cell phones asking them to comment on the allegations raised in this article. They acknowledged receipt of my message, but had not responded at all until my 2 p.m. deadline yesterday.
“Espenilla was certainly not acting on orders from here but from somewhere not too far from here, specifically from a building by the Pasig, “ a BSP source alleged, referring obviously to Malacanang, the President’s office. “Did Anti-Money Laundering Council executive director Vicente Aquino get orders from here when he disclosed to the Ombudsman last year (Renato) Corona’s dollar accounts, which sealed the chief justice’s fate?” he asked rhetorically.
The SES in a confidential memorandum 29 March 2011 to Governor Tetangco and the Monetary Board jointly signed by Espenilla and his subordinates alleged that “SMC Group’s aggressive expansion to new/noncore businesses that have yet to establish earnings contribution contribution together with its continued reliance on external funding exposes the Group to funding cost pressure.”
This may result in “financial distress” for the conglomerate, and “cause cascading breakdowns that can have systemic consequences because of the Group’s extensive linkages and interdependencies not only to the banking system but also to the Philippine economy as a whole,” the SES told the Monetary Board. The SES even practically alleged that SMC was concealing its true finances through its “opaque inter-relationships among SMC (Parent Company), its stockholders and subsidiaries.”
However, a reading of the SES memorandum leads to no other conclusion that it is biased against SMC and maliciously alarmed the Monetary Board by exaggerating the conglomerate’s financial difficulties in order to get authority to raise a red flag in the markets against the group.
First, the SES’ ill intent is obvious in the intricate “conglomerate map” (see image above) it included in its memorandum. The map for “SMC Group” included the more than two dozen companies under the family of Antonio Cojuangco, the nephew of then SMC controlling stockholder and Chairman Eduardo Cojuangco Jr., making the conglomerate appear to have so many disparate enterprises. It is well known though that Antonio is not at all involved in SMC, and his connection with his uncle is only through Paniqui Sugar Corp., the clan’s old sugar milling in which both have equity. (Antonio, 12% and Eduardo 15 percent.
The SES figures on banks’ exposures to “SMC Group”—which were obtained directly from the banks, and not from the SMC group—therefore include their exposures to companies of Antonio Cojuangco. No wonder that the SES’ data on the banks’ exposures to SMC exceeded the mandatory limits to a single borrower.
(The top three bank creditors, including their subsidiaries, to SMC Group, according to the memorandum are the BDO, Metrobank, and Bank of the Philippine Islands. The next two big creditors are government banks: Land Bank of the Philippines and the Development Bank of the Philippines.)
Second, while it pointed out that SMC’s net debt to EBIDTA (earnings before interest, taxes, depreciation, and amortization) ratio stood at 2.2, way below its financial covenant for a 5.1 ratio, it cast doubts on the figure by claiming that the 2.25 “number does not reflect the full year effect of Petron as its was only consolidated in December 2010. Analysts’ computations though show that after Petron’s debts were included, the group’s net debt to EBIDTA or its gearing ratio rose slightly to 3 and is presently, nearly three years after and after several more acquisitions, at 3.1.
Third, while it admitted that it was “not able to quantify” its claim, the SES report said: “If we factor into the equation banks’ exposure to SMC Group’s network of suppliers, distributors, and providers to the SMC conglomerate entities, collectively called as ‘entities in the SMC ecosystem’ the numbers (the group’s gearing ratio) could be higher.”
What was the purpose of the SES memorandum to the Monetary Board?
It was asking authority for an entirely new BSP regulatory mode to be undertaken on SMC, which it called a “Stress Test”. That would involve detailed probing into the conglomerate’s financials and even asking it to disclose its strategic plans. However, the BSP’s regulatory authority is limited only to banks and other financial institutions.
Espenilla in a meeting of the Monetary Board Mach 31, 2011 to discuss his recommendation admitted that such “stress test” had never been done to any company in the country before. Incredulous over the plan, a Monetary Board member asked him: “Do you think SMC will give SES its detailed strategic plans?”
Espenilla didn’t understand that the Board member was being sarcastic and replied that he had “talked already with SMC officials and is going to have a dialogue with them.” The Board member though commented: “SMC may unknowingly be the victim of the fishing expedition of SES.”
The implications on SMC if the Monetary Board had approved the SES request would have been disastrous.
News on the “stress test” would eventually leak, or be intentionally leaked out: Banks would suspect that SMC is on the brink of default, cut down on its exposures, triggering a run on the conglomerate’s debts.
Former Monetary Board Nelly Favis-Villafuerte was outraged by Deputy governor Espenilla’s memorandum and his vague answers to questions posed in a Monetary Board meeting for it. When Espenilla could give no concrete answer to her question on why the SES is veering away from its mandate of regular bank examinations, Villafuerte wrote in her memorandum to the Monetary Board:
“I therefore smell a shakedown of SMC.”
She pointed out in her memorandum that SMC obviously was being singled out: “Why discriminate against SMC? Why should SES zero-in on SMC? My suspicion is that SES intends to entrap SMC, the latter being unaware of the underlying motives of the SES.
Villafuerte did not mince words in her opposition to the move to clamp down on SMC:
“IF SES pursues to do to SMC what it proposes to do . . . this will have ALARMING consequences and CHILLING ill-effects not only to the banking industry but to the businesses doing transactions with banks as well; and worse, to our national economy.” (The emphasis through the all caps bold fonts was in Ms. Villafuerte’s memo.)
She warned: “If BSP should persist with its plan of action against SMC, it shall be sending the wrong signal to the business community. I predict that this ‘witchhunting’ against SMC will become a monumental scandal that will immeasurably discredit BSP under the helm of Governor Tetangco. (Again the emphasis is not mine, but is in Villafuerte’s memorandum.)
Villafuerte ventured on providing a motive for the SES’ planned move against SMC:
“The BSP under Governor Tetangco and Deputy governor Espenilla should be forewarned not to be the unwitting tool of the competitors’ of SMC in its diversification programs and its proposed participation in the PPP (public-private partnership) programs of President Aquino.
But was that the motive of the SES? Or was it another agenda, which also explains the other clampdown by Espenilla, that on billionaire Roberto Ongpin?
The above are the facts. On Wednesday, my analysis and opinion.
www.rigobertotiglao.com and www.trigger.ph