RCBC's 2002 Internal Office Memo on the PEACe Bonds

INTER-OFFICE MEMORANDUM

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TO : ALL ASSOCIATES

FROM : Financial Markets Group

SUBJECT : The "PEACe BONDS"

DATE : January 30, 2002

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What are the PEACe Bonds?

Peace Bonds are 10-year zero-coupon (no recurring interest payments) treasury bonds with certain

eligibilities designed to raise funds for poverty alleviation programs. These funds are raised from

proceeds of the sale of government securities in the private secondary market. The bonds were

conceptualized by the financial advisers of CODE-NGO, the largest network of development NGOs in the country.

What government securities are used for the PEACe Bonds?

Ten-year zero-coupon bonds issued by the Bureau of the Treasury on October 16, 2001 were the securities used for the PEACe Bonds. The Bureau issued P 35B worth of zero-coupon bonds from total bids of over P 135B.

What are the eligibilities attached to the PEACe Bonds?

PEACe Bonds have the following eligibilities:

Tax Exempt status by law per BIR Ruling 020-2001 issued May 31, 2001

Eligibility as Liquidity reserves issued by the Bangko Sentral ng Pilipinas per Resolution Nos. 878, 1261 and 1545 dated June 7, 2001, August 9, 2001, and September 27, 2001 of the Monetary Board later consolidated under BSP Circular No. 307 dated October 18, 2001.

Eligibility as capital and reserve investments of insurance companies under Sections 203 and 204 of the

Insurance Code issued by the Insurance Commission dated November 16, 2001.

How were the PEACe Bonds offered?

The bonds were offered to authorized securities dealers in an open public auction conducted by the

Bureau of Treasury on October 16, 2001. The notices were issued one week in advance of the auction as compared to the usual 3-day notice required by law.

Who can request for eligibilities with the above regulators? (BIR, BSP, IC)

From time to time the BIR, BSP and the Insurance Commission receive requests from government,

quasi-government and private corporations for certain eligibilities to be provided to certain instruments and/or transactions. The merits on whether to grant these eligibilities/requests are deliberated upon by these agencies on a case-to-case basis in their regular meetings. It is therefore not unusual for private corporations to request and be granted eligibilities by these agencies.

How was CODE-NGO able to sell the PEACe Bonds?

Following the concept of their financial advisers, CODE-NGO then proceeded to engage the services of an underwriter, RCBC Capital Corporation to purchase (underwrite) the bonds at a pre-determined price at a future date.

How was CODE NGO able to acquire the bonds?

In an auction administered by the Bureau of Treasury, CODE NGO was able to purchase the entire zero-coupon offering through its authorized government securities dealer, Rizal Commercial Banking Corporation.

Was the winning bid disadvantageous to the government?

No. On the contrary, CODE-NGO?s winning bid in the open auction for the 10-year zero-coupon bonds resulted in interest savings for the government. At the time of the bidding the prevailing rate for 10-year government securities was 16.93% gross or 13.544% net. The winning bid that enabled CODE NGO to purchase the bonds was 12.75% or .794% lower than the prevailing rates. The auction itself attracted P 137B in bids from various bidders in the financial market.

How was CODE NGO able to subsequently sell the PEACe Bonds?

CODE NGO subsequently sold the PEACe Bonds through an underwriter for eventual resale in the secondary financial markets thus raising P 1.3B currently held in trust for the permanent endowment of the PEACe foundation. The underwriter is RCBC Capital Corp., the investment arm of RCBC.

Was it unusual for RCBC as a Government Securities Eligible Dealer (GSED) to bid on behalf of CODE NGO?

Not at all. Most if not all GSEDs bid for resale in the secondary market. In fact, in a clarificatory note published in Businessworld on January 22, 2002. National Treasurer Sergio Edeza said: “Only GSEDs can participate in an auction. However, these GSEDs sell bonds in the secondary market after every auction. Any interested party can always buy government securities in the secondary market from Government Securities Eligible Dealers. The BTr does not in any way exercise control or regulate the trading of government securities in the secondary market. All transactions in the secondary market for government securities are the business of GSEDs.”

What was the nature of the funds that were raised through the PEACe Bonds?

The funds that were raised were ALL PRIVATE FUNDS. During the auction the funds that were delivered to the Bureau of Treasury were ALL PRIVATE FUNDS. The funds subsequently raised through the secondary sale of the PEACe Bonds were ALL PRIVATE FUNDS. NO Government Funds were used in the entire process.

RCBC does not engage in questionable transactions. Neither will it involve itself in a “scam” nor engage in “insider trading.” The auction was conducted by the Bureau of Treasury and was open to all Government Securities Eligible Dealers (GSEDs). The secondary private placement of the PEACe Bonds was done after the auction. It was a normal, private secondary market transaction using private funds.