Paying debt with other people’s money



WHEN a company taps the public for funds by selling them shares under an initial public offering, it should tell its prospective investors how it would use other people’s money (OPM) that it expects to generate from such an offering.

SBS Philippines Corp. did this as expected. It laid down the projects that it intended to finance with the public’s money. Expansion is one of them, but it also happens to be the most abused reason for undertaking an IPO.

The company did disclose that it would pay its biggest creditor, which was good for the public, but failed to tell them that it could not proceed with its plan as it had stated in the prospectus it filed with the Securities and Exchange Commission (SEC).

All SBS did was to meet its obligation with one bank creditor, which was BDO Unibank Inc., with still a lot of money left for the company to pursue its expansion plan.

The IPO of SBS Philippines is a good story to tell.

SBS Philippines reported P42.75 million as “IPO-related expenses.” Then in a footnote, it said it also spent P22.1 million “prior to the receipt of the offering proceeds,” which it “will charge against the IPO proceeds in the last quarter of 2015.”

This “deferment” should bring the total “IPO-related expenses” of SBS Philippines to P64.85 million.

Timely disclosure
Perhaps, SBS should have explained to the public the difference between reporting now and reporting later when numbers are supposed not to change at all. Has anyone heard about mathematics being a perfect science?

Re-computation of the numbers as they appear in SBS’s filing showed that the company spent a total of P64.85 million and not only P42.75 million in “IPO-related expenses” To the public, delaying some deductible expenses for the sake of accounting convenience would not be fair to them.

Since SBS also included P22.1 million as “IPO-related expenses,” it should have made a separate computation to show the effect of said amount NOW and not later, which would be in the last quarter of 2015.

The outsiders who are not privy to the board but who nevertheless bought SBS shares require more details of how the company used the proceeds raised from the public offering. Did the company sell shares to them so that it could use their money to pay BDO Unibank Inc. P282.9 million including interest? The filing, by the way, did not state the principal amount.

Auditors’ report
Punongbayan & Araullo is the external auditor of SBS Philippines which analyzed the company’s financial filing. Again, in a footnote to its report, it reported that “…the offering proceeds from the IPO are not immediately applied to the specified purpose stated in the offering circular.”

Really? Why didn’t SBS use the net proceeds of P829.3 million for, among others, “product expansion,” as it said so in its posting on the website of the Philippine Stock Exchange? It would appear to the public that the company needed the money only to be able to pay its debt with BDO which, at five percent interest per annum, “carried higher interest rates compared to other credit facilities.”

The P&A audit report listed some of the projects lined up for financing with the proceeds from SBS’ sale of shares. Among them was “the acquisition of a 19,373-square meter industrial property located at the west side of the National Road within Barangay Tunasan, Muntinlupa City.”

Money market placements
If the public stockholders of SBS Philippines are interested to know where their money went, rely on P&A to provide them the answer. “As of Sept. 30, 2015,” the external auditor said, “the remaining balance of the offering proceeds was invested in short-term money market placements.” That’s a lot of money to play with in over a year.

In April last year, SBS Philippines sold to the public 420 million shares at P2.75 each. From this public offering, it grossed P1.15 billion. Minus “IPO-related expenses” of P42.75 million, the company had P1.11 billion in net proceeds. After paying BDO P282.9 million, it still had P829.3 million left.

The public investors should not be satisfied with SBS’ own presentation because they should have been told that the company had yet to deduct P22.1 million, which it chose to defer to the “last quarter of 2015.” By proceeding with their own computation, they would arrive at net IPO proceeds of P807.22 million.

Here are two questions that the public stockholders of SBS should ask: How much of the IPO money did it invest outside the company? What happened to the purpose of the offering?

Finally, the public should wait for SBS’ financial filing for the third quarter of the year. They would probably be interested to know how much their money earned from the company’s money market placements.


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  1. matter of accounting issues. not really a big thing as compared to what the author is making to appear.
    Although, I get the drift of full proper disclosure, and it was ACTUALLY stated in the report. it was just not presented in a more layman’s term.
    As far as regulations are concerned, the suggestion of the author is reasonable and we hope the SEC can add his suggestions for more security to the investors.

    Finally, there’s nothing wrong with the report.