Contributed By Morales & Justiniano
The recent economic cycles and the regulatory environment have not affected the direction and trends of the loan market in the Philippines. The Philippine banking and finance system remains strong and stable, as the economy has continued to grow annually at more than 6% in recent years amid global financial turmoil. As banks have become quite liquid, they have increased their lending activities, which has resulted in the lowering of interest rates for borrowers. Banks continue to be a major source of funding for local business and industry.
Banks and financial institutions are investing for clients in high-yielding instruments issued by foreign financial institutions, to provide alternative investment outlets and preserve client bases. Local investors are starting to invest more in mutual funds and other collective investment schemes, rather than to continue to place funds in traditional bank deposits that do not earn significant interest earnings for them. However, these emerging trends have not substantially affected financing terms or the structures of domestic banks and financial institutions.
Large companies are increasingly accessing the capital markets for financing, instead of borrowing from banks. This has resulted in the growing prominence of bonds and preferred shares as alternative financing instruments.
Universal and commercial banks themselves have been resorting to Global Master Repurchase Agreement-based repurchase transactions to obtain funding as initial sellers of securities. They have also issued Tier-2 capital instruments to comply with Basel III capital adequacy requirements.
Given the very low interest income from bank deposits, banks have been offering clients investment products linked to underlying high-yielding instruments issued by foreign financial institutions, in order to maintain their client base. Insurance companies are also offering similar products to their clients.
There are no recent or expected legal, tax, regulatory or other developments that are likely to have a significant impact on the loan market in the Philippines, save for the increase in the documentary stamp tax on loan agreements from 0.5% to 0.75% of the loan amount.
The licence issued by the Bangko Sentral ng Pilipinas to banks operating in the Philippines carries with it the authority to provide financing to a company organised in the Philippines, subject to the usual lending restrictions (such as the single borrower’s limit). Non-banks can also provide similar financing if it is permitted in their articles of incorporation, and subject to internal corporate approvals.
Foreign banks and non-banks providing financing from their respective jurisdictions to a Philippine company are not considered to be doing business in the Philippines, so do not need to be licensed or authorised by the Securities and Exchange Commission of the Philippines or the Bangko Sentral ng Pilipinas for that purpose.
Foreign lenders are not restricted in any way from granting loans, although their loans will require prior Bangko Sentral ng Pilipinas registration if the foreign currency that will be used by the Philippine borrower to service the loans will be sourced from the domestic banking system. If this requirement is not met by the borrower, the validity of the loan will not be affected but the borrower cannot purchase foreign currency with pesos from banks operating in the Philippines or their affiliated forex companies. Foreign currency can, however, be sourced from money changers and forex companies not affiliated with banks.
The granting of security or guarantees to foreign lenders is not restricted or impeded in any way by law or regulation.
The borrower cannot convert pesos into foreign currency through the domestic banking system for the purpose of servicing loans required to be but not registered by the Bangko Sentral ng Pilipinas.
There are no restrictions on the borrower’s use of proceeds from loans or debt securities. However, any deviation from the agreed usage of such proceeds, without the approval of the lender, can constitute an event of default that can trigger the acceleration of the maturity of the loan.
The concepts of "agency" and "trust" are recognised in the Philippines; accordingly, no alternative structure has been devised and used.
Loans are transferable together with the associated security package. The Civil Code of the Philippines provides that “the assignment of credit includes all the accessory rights, such as a guaranty, mortgage, pledge or preference.” The transfer can be accomplished through a notarised deed of assignment or similar documentation, even without the consent of the borrower.
Debt buy-back by the borrower or sponsor is permitted.
In the privatisation of government assets as well as the bidding of government projects, the buyer or bidder must indicate that “certain funds” are in place to close or implement the transaction or project. There is no prescribed form of documentation, but a typical fund assurance is a standby letter of credit from a bank that is acceptable to the government agency concerned. This is not publicly filed but is submitted to the government committee that evaluates the bids.
If a person or group of persons acting in concert intends to acquire at least 35% of the outstanding voting shares in a public company, such person or group must make a tender offer for the share percentage sought to all holders of such shares. For this purpose, it must be shown that the offeror has the funds to implement the offer in full.
Payments of interest to foreign lenders are subject to a 20% withholding tax. If any applicable tax treaty provides for a lower tax rate, the treaty rate will apply. There is no withholding tax for principal payments.
Loan agreements are subject to a documentary stamp tax, equivalent to 0.75% of the loan. On the other hand, the documentary stamp tax on each mortgage and security agreement is 0.8% on the first PHP5,000 of the loan secured thereby, and 0.4% on each additional PHP5,000. However, if the loan transaction and the security arrangements are documented as one agreement (usually an omnibus loan and security agreement, as explained in 8.3 Government Approvals, Taxes, Fees or Other Charges below), the single agreement attracts only one documentary stamp tax, equivalent to 0.75% of the loan amount.
There is no usury law in effect in the Philippines. However, a Philippine court can reduce interest that is determined to be excessive or unconscionable.
Assets that are classified as personal or movable property (including equity or debt securities) can be used as collateral via a chattel mortgage or a pledge, but these two security devices will eventually be phased out and replaced by the security agreement contemplated by the Personal Property Security Act. Real or immovable property can be mortgaged to lenders.
A chattel mortgage is perfected upon the execution of a deed of chattel mortgage by the mortgagor and the mortgagee. In order to bind third persons, the deed must be notarised and the mortgagor and the mortgagee must execute an “affidavit of good faith” wherein they affirm that the chattel mortgage is made to secure a just and valid obligation and not for a fraudulent purpose. In addition, the deed must be recorded with the pertinent Register of Deeds.
A deed of pledge must be notarised and the collateral delivered to the pledgee or a third person mutually acceptable to the pledgor and the pledgee. There is no registry for pledges.
The collateral mortgaged or pledged cannot be appropriated by the mortgagee or pledgee if the borrower defaults. The law requires the foreclosure of the chattel mortgage or pledge.
A deed of real estate mortgage must be notarised and registered with the Register of Deeds in order to bind third persons, as well as foreclosed in case of default by the borrower. A foreign lender cannot purchase and acquire the title to the mortgaged property at a foreclosure sale if the property is a parcel of land because only Philippine nationals are allowed to own land in the Philippines. However, a foreign bank authorised to do business in the Philippines can bid at the foreclosure sale of the mortgaged land and, if adjudged as the winning bidder, can purchase and take possession of the land without acquiring the title thereto for a period of five years. Within this period, the foreign bank must transfer the land to a qualified Philippine national.
Mortgages and security agreements are each subject to a documentary stamp tax of 0.8% on the first PHP5,000 of the secured loan, and 0.4% on every additional PHP5,000. To avoid penalties, interests and surcharges, the tax must be paid no later than the fifth day following the month of execution of the relevant document. Unless the tax is paid, the document will not be admitted as evidence in a court proceeding.
There is a schedule of fees payable to the Register of Deeds for the registration of real estate mortgages. The fee is PHP8,796 (approximately USD150) if the secured loan does not exceed PHP1.7 million. For every PHP20,000 (or fraction thereof) in excess of PHP1.7 million, there is an additional fee of PHP90.
Under the Personal Property Security Act, chattel mortgages and pledges will be phased out as security devices over personal property. In lieu thereof, a security interest in personal property will be created between the contracting parties by the execution of a security agreement between the security provider and the secured party. In order to make the security interest over tangible personal property binding on third persons, the security agreement must be registered in a centralised and nationwide electronic registry administered by the Land Registration Authority, or the secured party must be given possession of the collateral. In the case of intangible personal property, the security interest must be registered as aforesaid or, alternatively, control over the collateral must be given to the secured party.
Philippine law does not permit a floating charge or other universal or similar security interest over all present and future assets of a company. However, it can be stipulated in a real estate mortgage that the collateral will cover real property acquired by the mortgagor after the constitution of the mortgage. Moreover, under the Personal Property Security Act, a security agreement can cover future personal property but the security interest therein becomes effective only when the security provider “acquires rights in it or the power to encumber it.”
Philippine entities can give downstream, upstream and cross-stream guarantees, with or without the benefit of excussion. If this benefit is not waived, the guarantor cannot be compelled to pay the guaranteed party unless the latter has exhausted all the borrower’s property and has resorted to all legal remedies against the borrower.
A target that has been acquired is not restricted from granting guarantees or security or financial assistance for the acquisition of its own shares.
The grant of security or guarantees must have internal corporate approvals.
If a guarantee is not registered with the Bangko Sentral ng Pilipinas, any peso amount paid thereunder cannot be converted into foreign currency through the domestic banking system for remittance to the foreign lender. The Bangko Sentral ng Pilipinas will not register the guarantee unless the loan itself has been registered.
If the loan is fully paid, then the security is released. For good measure, the cancellation of the real estate mortgage must be reported to the pertinent Register of Deeds for recording. In the case of personal property, a termination notice needs to be registered.
As regards competing security interests, each lender will have priority in relation to the collateral specifically given to it. In the context of a mortgage trust indenture (or similar documentation) where subsequent lenders are included, from time to time, as additional parties secured by the same pool of collateral, all the lenders are usually treated pari passu or on equal footing. Priority can be contractually waived.
Subordination is effected contractually. Contractual subordination provisions will survive the insolvency of a borrower incorporated in the Philippines.
A secured lender can enforce its collateral if the borrower is in default and the loan becomes due and payable due to the acceleration of its maturity. As a rule, the real estate mortgage must be foreclosed, and the lender collects the net proceeds from the sale of the collateral. If the net proceeds are not sufficient, the lender can file an action in court to claim the deficiency from the mortgagor or borrower. Under the Personal Property Security Act, the debtor is liable for any deficiency if there is no stipulation to the contrary.
The lender can demand immediate payment from the guarantor unless the guarantor is entitled to the benefit of excussion, in which case the lender must first exhaust all the borrower’s property and resort to all legal remedies against the borrower before the lender can go after the guarantor. If there is no benefit of excussion, the guarantor becomes a surety immediately liable to the lender if the borrower defaults. A guarantee or suretyship under the Civil Code of the Philippines is an accessory contract that cannot exist without a valid principal obligation secured thereby. Having said that, it is possible for a guarantor to secure an obligation as a primary obligor and not merely as a surety, in which case the guarantee is not an accessory contract and can exist independently of the obligation secured thereby.
The choice of a foreign law as the governing law of the contract will be upheld in the Philippines, as will a submission to a foreign jurisdiction and waiver of immunity.
A final judgment by a foreign court or an arbitral award against a Philippine company would be enforceable in the Philippines without a retrial of the merits of the case. However, the foreign judgment may be repelled by evidence that:
The enforcement of the arbitral award will be made in accordance with the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.
Upon default by the borrower, a foreign lender cannot simply appropriate the collateral mortgaged or pledged. As a rule, the security must be foreclosed and the collateral sold at public or private auction.
Under the Financial Rehabilitation and Insolvency Act of 2010, rehabilitation proceedings may be filed in court by or against an insolvent corporate borrower. The court will order the liquidation of the insolvent if rehabilitation is not feasible. The Act does not apply to banks, quasi-banks, insurance companies and pre-need companies, which are subject to different insolvency rules that contemplate conservatorship, followed by receivership if conservatorship is not successful, and then liquidation of the insolvent financial institution.
Under the Financial Rehabilitation and Insolvency Act of 2010, the enforcement of security through foreclosure may be suspended during the rehabilitation of the borrower, and there is a requirement for lenders to confirm their contracts with the borrower. Other than this, there is no impairment of a lender’s rights to enforce its loan and security. Furthermore, a stay or suspension order in rehabilitation proceedings does not apply to the enforcement of guarantees with no benefit of excussion.
The creditors are to be paid in accordance with the rules on “concurrence and preference of credits” in the Civil Code of the Philippines, which apply to the immovable or real property of the insolvent. Under the Personal Property Security Act, the priority accorded to a security interest perfected prior to the insolvency of the security provider is generally not affected by the insolvency proceedings.
The Philippines has no concept of equitable subordination or anything similar.
If the borrower, security provider or guarantor were to become insolvent, the lenders might not be able to enforce their rights under the underlying agreement in accordance with its terms. If the insolvent were to be liquidated, the rules on “concurrence and preference of credits” in the Civil Code of the Philippines would apply to the lenders.
The Build, Operate and Transfer (BOT) Law authorises the financing, construction, operation and maintenance of government infrastructure projects by the private sector, through build-operate-transfer and similar arrangements.
Generally, the sponsors will form a project company in the Philippines, which borrows from local and/or international lenders; these loans are secured by the company’s assets and the shareholding of the sponsors in the company. The company enters into a regime of lender-controlled “cash waterfall” to manage the inflow and outflow of revenues. As a rule, the project company is required to maintain 80:20 debt-to-equity ratio.
The BOT Law and its implementing rules apply to public-private partnership (PPP) transactions in the Philippines. Eligible PPP projects include public utilities such as highways, airports, water supply, and telecommunications.
The Constitution of the Philippines requires at least 60% of the capital of a public utility project company to be owned by Philippine citizens. The company must have a franchise or authorisation to operate a public utility for no more than 50 years. The participation of foreign investors in its board of directors is limited to their share in its capital. All its executive and managing officers must be citizens of the Philippines.
Having made the foregoing points, the Philippines is moving away from PPP towards a Build-Build-Build programme, wherein the government itself undertakes to build the infrastructure with taxes, official development assistance and commercial loans to the government. After the completion of the project, the government may privatise the same or otherwise turn over the operation thereof to the private sector.
The Investment Co-ordinating Committee of the National Economic and Development Authority (NEDA) approves national projects costing up to PHP300 million, while the NEDA Board itself approves national projects costing more than PHP300 million and all negotiated projects, regardless of the amount. A local project needs the approval of the local legislative body.
The usual contract is called an omnibus loan and security agreement, which embodies all the various loan facilities and the security arrangements. This omnibus agreement attracts only one documentary stamp tax, equivalent to 0.75% of the loan facilities. If the loan facilities and security arrangements were documented separately from each other, each loan facility would be subject to a 0.75% documentary stamp tax while each mortgage and security agreement would attract a 0.8% documentary stamp tax on the first PHP5,000 of the loan secured thereby, and 0.4% on each additional PHP5,000. There is no similar stamp tax for guarantees.
The proposed documentation is usually reviewed by the Office of the Government Corporate Counsel and the Office of the Solicitor General. The Department of Finance may also be involved in the process.
The contracts are usually governed by Philippine law.
The project company pays taxes, but it can be granted tax incentives in a proper case.
The PPP Centre assists government units and agencies in the development of PPP projects, in addition to co-ordinating and monitoring these projects. However (as mentioned in 8.3 Government Approvals, Taxes, Fees or Other Charges above), the NEDA’s Investment Co-ordinating Committee approves national projects costing up to PHP300 million, the NEDA Board itself approves national projects exceeding that threshold amount as well as all negotiated projects, and the local legislative body is the approving authority for local projects.
The state owns public utilities and has privatised a number of them. In PPP projects, the government will acquire ownership of the underlying assets after the lapse of the period stipulated in the contract.
The project vehicle takes the form of a stock company under the Corporation Code of the Philippines. The project sponsors subscribe to its capital stock. As mentioned above (see 8.2 Overview of Public-private Partnership Transactions), a project company that will operate a public utility must be owned at least 60% by Philippine citizens.
In addition to the equity of the project sponsors and aside from suppliers' credit, financing is sourced from local and international lenders. Bilateral or official credit agencies and multilateral financial institutions are also common sources of credit.
Natural resources are owned by the state. The Constitution of the Philippines requires the exploration, development and utilisation of natural resources to be under the control and supervision of the state. However, the state can enter into co-production, joint venture or production-sharing agreements with Philippine citizens, or with corporations whose capital is owned at least 60% by Philippine citizens. The President of the Philippines can also enter into agreements with foreign companies involving technical or financial assistance for large-scale exploration, development and utilisation of minerals, petroleum and other mineral oils.
The export of natural resources will require government clearance, including from the Mines and GeoSciences Bureau.
Every project that significantly affects the quality of the environment will require an Environmental Impact Statement, which is prepared by the project proponent with the assistance of the government agency concerned. It is subject to review and evaluation by the Environment Management Bureau of the Department of Environment and Natural Resources. Health and safety standards in the workplace are provided by law, including the Labour Code of the Philippines, which is administered by the Department of Labour and Employment.
Islamic finance was officially recognised in the Philippines over 40 years ago, when a legislative charter was granted to Al Amanah Bank, the first Islamic bank in the country. This bank was reorganised in 1990 as Al-Amanah Islamic Investment Bank of the Philippines. The Congress of the Philippines has yet to pass a general legal framework for Islamic banking and finance in the Philippines, but the recently passed Bangsamoro Organic Law grants the Bangsamoro Parliament the power to enact laws on Islamic finance. Pending the enactment of any such laws, there is, in fact, no impediment to the development of Islamic finance in the Philippines, because the Civil Code grants the contracting parties the freedom to stipulate lawful terms and conditions in their contract. This autonomy in contract-making will allow the adoption of terms and conditions in Islamic finance, with the approval of the Bangko Sentral ng Pilipinas, the Insurance Commission, and the Securities and Exchange Commission, as appropriate. There is no law prohibiting foreign institutions from offering Islamic financial products in the Philippines, subject to licensing if they are thereby considered to be doing business in the Philippines.
At present, there is no regulatory and tax framework that applies specifically to the provision of Islamic finance in the Philippines, including the issuance of sukuk and takaful insurance. Existing legislation – particularly the Civil Code of the Philippines – would enable the issuance of sukuk, given that the contracting parties thereunder are free to stipulate any and all terms and conditions in their agreement, provided that they are “not contrary to law, morals, good customs, public order or public policy.” The prohibition against riba (interest) does not pose a problem, since the Civil Code states that “no interest shall be due unless it has been expressly stipulated in writing.” Thus, if the sukuk documentation does not contemplate the payment of interest, then no interest will be payable thereunder.
In general, an Islamic bank has flexibility in structuring its Shari'a-compliant products and services, as long as they do not permit the haram (forbidden) or forbid the halal (permissible). Among others, the Al-Amanah Islamic Investment Bank of the Philippines is authorised to provide financing with or without collateral by way of al-ijarah (leasing), al-bai ul takjiri (sale and leaseback) or al-murabahah (cost-plus-profit sales arrangement).
Currently, there is no clarity as to how the claims of sukuk holders would be treated in insolvency or restructuring proceedings, since there is no judicial or administrative ruling on whether sukuk instruments will be characterised as equity or debt instruments.
There have not yet been any cases on jurisdictional issues, the applicability of Shari'a, or the conflict of Shari'a and local law that are relevant to the banking and finance sector.