Notes to Financial Statements - BDO

Notes to Financial StatementsDECEMBER 31, 2008, 2007 AND 2006(Amounts in Millions Except Per Share Data)Senior NotesOn November 23, 2004, the Board of Directors approved the issuance of senior bonds. Relative to this, on February 18, 2005 the Parent Bankissued US$100 million, 6.5% senior notes due in 2008 (the “Senior Note”). The issuance of the bonds under the terms approved by the Boardof Directors was approved by the BSP on January 31, 2005. Among the significant terms and conditions of the issuance of the senior notesare:(a) Issue price at 99.3% of the principal amount;(b) The senior notes bear interest at the rate of 6.5% per annum from and including February 18, 2005 to but excluding February 19, 2008.Interest will be payable semi-annually in arrears on February 19 and August 19 of each year, commencing August 19, 2005, except thatthe first payment of interest will be in respect of the period from and including February 18, 2005 but excluding August 19, 2005;(c) The senior notes will constitute direct, senior, unconditional, and unsecured obligations of the Bank and claims in respect of the notesshall at all times rank pari passu and without any preference among themselves. The payment obligations of the Bank under the seniornotes shall at all times rank at least equally with all other present and future unsecured and unsubordinated obligations of the ParentBank, including liabilities in respect of deposits;(d) The Bank may redeem the senior notes in whole but not in part at redemption price equal to 100% of the principal amount of the SeniorNotes together with accrued and unpaid interest to the date fixed for redemption upon the occurrence of certain changes affectingtaxation in the Philippines, as more particularly specified in the covering offering circular; and,(e) The 2008 senior notes are not guaranteed or insured by the PDIC and are not deposit liabilities of the Parent Bank.On February 15, 2008, the Group settled in full the outstanding senior notes amounting to P4,174, inclusive of accrued interest of P119.On October 16, 2003, the Group listed 6.5% US$150 senior notes in the Singapore Stock Exchange with maturity on October 16, 2008. Thenet proceeds from the issuance of the senior notes amounted to US$147 or about P8,890. Interest expense incurred by the Group on thesesenior notes amounted to P290 in 2008, P637 in 2007 and P478 in 2006 (shown as part of Interest Expense on Bills Payable and Others underInterest Expense account in the income statement). On October 16, 2006, $36 worth of senior notes was redeemed by various noteholders.The Group settled in full the outstanding senior notes of P5,536 on October 15, 2008 inclusive of accrued interest of P160.SMPHI (Preferred Shares)As required under PAS 32, Financial Instruments: Disclosures and Presentation, the Group recognized as financial liability 25,000,000 sharesof redeemable, cumulative and non-participating preferred shares with a par value of P10 per share issued to SMPHI on October 18, 2004.The preferred shares were issued at US$2 per share or an aggregate subscription price of US$50. The preferred shares entitle SMPHI tocumulative dividends, payable in US dollars semi-annually in arrears, equal to 6.5% of the issue price per annum. The Group is also requiredto redeem the preferred shares from SMPHI at the original issue price five years from the date of issue. As required by BSP, the Bank set upa sinking fund on October 17, 2005 for the redemption of the preferred shares. The balance of the sinking fund as of December 31, 2008and 2007 amounted to P2,110 and P1,357, respectively, and is invested in debt securities, shown as part of HTM investments (see Note 9.3).Dividends in arrears (recognized as interest expense) as of December 31, 2008 and 2007 amounted to P31 and P94, respectively, computedusing the exchange rate at year end and are presented as part of Bills Payable account in the statements of condition.17. SUBORDINATED NOTES PAYABLEThe components of this account are shown below:GroupParent Bank2008 2007 2008 2007Unsecured subordinated notes– P20 billion P 20,146 P 10,074 P 20,146 P 10,074Unsecured subordinated notes– US$200 million - 8,557 - 8,557P 20,146 P 18,631 P 20,146 P 18,631Total interest expense on subordinated notes payable amounted to P1,687 and P971 and P277 in 2008, 2007 and 2006, respectively, both inthe Group and Parent Bank financial statements (see Note 21).P20 Billion Unsecured Subordinated NotesOn November 21, 2007, the Group issued P10 billion unsecured subordinated notes eligible as Lower Tier 2 Capital due on 2017, callable withstep-up in 2012 (the “notes”) pursuant to the authority granted by the BSP to the Group on October 8, 2007 and BSP Circular No. 280 Seriesof 2001, as amended. The issuance was approved by the Board of Directors, in its special meeting held on June 1, 2007.60Thinking Ahead To Get You Ahead • Annual Report 2008