Villar and the Vista Land IPO

Here’s how a banker friend explained it:

Facts (all of which, except where indicated, are publicly available information) :

1. In July, 1997, Camella & Palmera Homes (“C&P”; Bloomberg ticker is CPHome) issued US Dollar-denominated floating rate notes (“FRN’s”) with an issue size of USD 150 million. The FRN’s were due to mature in January, 2003, at which point C&P was supposed to pay the entire principal amount of USD 150 million. In the meantime, C&P was obligated to pay interest on the notes. C&P was controlled by Manny Villar who was the ultimate beneficial owner of a controlling stake in the company.

2. On October 27, 1999, C&P announced a payment default on the FRN’s, i.e., that they would stop paying the interest on the bonds and that they wouldn’t be paying the principal on maturity date. They also defaulted on all of their bank debts and the peso-denominated commercial paper which was sold to the Philippine general public. Among the Philippine banks that had lent a large amount of money to C&P and therefore suffered huge losses by lending to the company were BPI, Metrobank and RCBC. At the same time, both local and foreign banks had sold the FRN’s and commercial papers to Filipino investors, both institutional investors and individual investors.

When the default was announced, Manny Villar was Speaker of the House.

3. C&P hired Deutsche Bank, then headed by Lito Camacho, to be their financial advisor in negotiating a restructuring agreement with its creditors.

4. As financial advisor, Deutsche Bank conducted several meetings between C&P officers and representatives of its various creditors for the purpose of agreeing on a restructuring plan. Assuming that C&P was in good faith, creditors attended these meetings. Foreign bank representatives would even fly to Manila just for the sole purpose of attending these restructuring meetings.

5. Finally, a restructuring plan was reached which had a good chance of being approved by the creditors. It would require the creditors to take a hit, i.e., suffer some losses, but at least it signified that C&P was sincere in servicing its obligations. It entailed some equity infusion by the principal shareholder, Manny Villar, and more oversight of the company by creditors. In exchange for taking a hit, creditors would be given equity in the company and would be able to monitor and have some control over cash disbursements.

6. Note that prior to C&P’s default on its debt, it was announced in the local newspapers that Ayala would be buying a stake in C&P and would be doing its due diligence. After several months of due diligence, however, it was quietly announced that the deal was off. The reason for the deal falling through was not publicized, but it became known in the market that it was primarily due to very poor governance of C&P. Recorded sales were allegedly fictituous, lands acquired by the company were allegedly defectively titled or had no titles at all, and there were allegedly no controls over cash disbursements: it was allegedly a one-man show ran by Mr Villar with no one in the company questioning his instructions to disburse cash.

7. When creditors started following up the finalization of the restructuring plan, C&P officers simply stopped answering phone calls or told creditors they were awaiting the decision of the main decision maker, Mr. Manny Villar. But Mr. Villar never approved the restructuring plan and C&P never again met with its creditors as a group.

Even Deutsche Bank officers said they couldn’t get a decision from C&P. It would be interesting to know if Deutsche Bank ever got paid for its financial advisory fees.

8. Instead, C&P officers approached its creditors on a one-on-one basis and tried to armtwist each one into agreeing to very onerous terms in dacion en pago deals. Creditors were told the company had very limited assets of value, and they would do well to just retire C&P’s debt in exchange for land. C&P unilaterally dictated the valuation of the land, and in the case of the FRN’s, unilaterally dictated the USD-peso exchange rate at which the dacion would be done. When creditors protested because the terms were very onerous, they were told to take it or leave it, that if they didn’t take the assets being offered, other creditors would, and they would therefore run the risk of getting nothing at all. Most, if not all, of the land being rammed down creditors’ throats couldn’t be sold even at much lower prices than those dictated by C&P as the dacion price. As a reflection of the very onerous terms of the dacion, the USD-denominated FRN’s traded at 8% of their par value, which means bond investors lost 92% of their investment.

9. Similarly, those who subscribed to the stock of C&P at its initial public offering, and who have held on to the stock all these years have effectively lost their shirts. (Note: you may want to ask someone who knows how to work the Bloomberg system to track what P100 invested in the IPO of C&P in the early 1990’s would be worth now. My own calculation is P1, but I am not sure if this is correct and this figure needs to be verified.)

10. The ending of the C&P FRN saga is that creditors who had held on to the FRN’s got paid, in 2007, a pittance of their original investment made in 1997. (Sorry I can’t remember the exact amount of the payout, but it may be anywhere from 15 to 30 cents on the dollar.). This is apart from NOT being paid anything at all from 1999 to 2007.

Why did C&P bother to pay creditors at all? Because by doing so, it paved the way for Mr Villar to make MORE money AGAIN–and AGAIN, at the expense of others.

Mr. Villar wanted to monetize, for the second time, the same junky assets that comprised C&P, so he did the IPO of Vista Land, which is essentially C&P–junky assets, poor governance and all–but disguised under a different name.

To do this, he needed to settle the outstanding obligations of C&P, including its defaulted FRN’s, otherwise Vista Land wouldn’t have been allowed to list.

So C&P finally paid off its creditors at a highly discounted price unilaterally dictated by itself, with no dialogue with its creditors.

11. Why did our regulatory bodies, like the Securities & Exchange Commission and the Philippine Stock Exchange (PSE), knowing what they knew about C&P, Vista Land and Mr Villar, allow the listing to take place at all? That is a question which merits further investigation. Reliable sources say that Mr Villar knew some skeletons in the closet of the PSE and threatened to expose these if PSE blocked the listing.

12. Predictably, those who invested in the Vista Land IPO lost their shirts. It is interesting to note that Dubai Investment Authority was one of the largest subscribers to the Vista Land IPO (reportedly USD 80 million), and two years later, the whole of Dubai declared its own debt default. One can conclude Mr Villar’s companies have an unbroken track record of bankrupting its investors.

Questions to ask ourselves:

1. Theoretically, shareholders have the largest to gain OR TO LOSE from the success or failure of a company. Before creditors take a loss, the shareholders must make them whole. Similarly, if minority shareholders are treated fairly (unfortunately, they rarely are in the Philippines) , ALL shareholders, whether controlling or minority, must realize the same proportionate gains and losses if invested in the same company.

How is it then possible that ALL stakeholders in Mr Villar’s companies, whether creditors or minority shareholders, EXCEPT Mr Villar himself, have lost practically their entire investment in his companies? Doesn’t it stand to reason that Mr Villar should have shared proportionately in the financial pain of his companies’ minority shareholders, and more so his creditors? How can he be so rich, when his fellow shareholders have lost the bulk of their investment in his companies?

It appears the only beneficiary to Mr Villar’s well-touted managerial skills (based on his campaign representations) is Mr Villar himself.

2. Shareholder value is reflected in the price per share of a company. It is the market- determined– and arguably most objective–measure of a company’s management. Based on the abysmal share performance of both C&P and Vista Land, both run and controlled by Mr Villar, Mr Villar has a consistent track record in value DESTRUCTION rather than creation.

The experience of investors in Mr Villar’s companies is a dire warning to Filipino voters: look what happens to those who stake their future on Mr Villar. Lahat ng tumaya kay Manny Villar ay nabigo.

3. Most of the voting public will be indifferent to the fact that Mr Villar’s companies didn’t pay their debts. But do you think banks merely swallow their loan losses and don’t pass on the cost of defaults? Of course not. Ultimately, it is the general public who pays for losses incurred by banks from loan defaults. How? Banks impute the cost of defaults in their pricing for loans and deposits. The more banks lose from loan defaults, the more they will have to recover from their other customers. They will pay less for deposits, and they will charge higher for loans. Indirectly, WE–you and I– end up paying, indirectly, for Mr Villarks mismanagement of his companies.

4. Having experienced the C&P debt default and the shabby treatment of its creditors, do you think foreign banks will lend to any entity run by Mr Villar? What does this imply for the Philippines- -always in need of foreign funding for much needed infrastructure projects and to plug our chronic budget deficit–if Mr Villar became our President/CEO?

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