The Development Bank of the Philippines (DBP) recently issued P6.5 billion worth of unsecured and subordinated tier 2 notes with a 7.75% coupon rate.
The notes mature in 10 years but have a step-up rate on its fifth year. This means DBP can redeem the notes on the fifth year or else it will have to increase the coupon rate.
Proceeds of the debt issuance will provide working capital to the bank and also increase its capital adequacy ratios.
What is a tier 2 note?
A tier 2 note is a debt security issue used to provide a firm with supplementary capital, as opposed to tier 1 capital which refers to common and preferred stock issuances and retained earnings. As a fixed income security, the note pays a regular fixed interest payment. In the case of the DBP tier 2 issue, the coupon rate is 7.75% of the par value of the debt security.
What does it mean by an unsecured and subordinated security?
An unsecured security means it is not backed by a collateral. Meaning, in the case of bankruptcy, the company’s pledged assets are liquidated and paid first to secured bond investors before being paid to holders of unsecured bonds. A subordinated debt has a lower priority than other bonds of the issuer in case of liquidation during bankruptcy. Normally, they are paid right before stockholders are given their residual shares in the company. In the case of the DBP issuance, however, the tier 2 notes are said to be ranked in priority compared to other borrowings of DBP.
Is this investment covered by the PDIC?
Because tier 2 notes are debt security investments and not regular bank deposits, they are not covered by the Philippine Deposit Insurance Corporation (PDIC).
So does that mean this is a risky investment?
Not necessarily. Although tier 2 notes do possess a small amount of risk, historically, the Philippine government and its government owned or controlled corporations (GOCC) such as the DBP have not defaulted on its borrowings.
How can I invest in these tier 2 notes?
Unlike Retail Treasury Bonds, these notes are normally not offered to individual investors. Institutional investors are the typical targets of these types of securities but for high-networth individuals, they can approach their bank to inquire about how they can acquire a portion of these investments.
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