Bank industry source explained PDIC is paying EIB’s P10 billion NPAs with the 30 percent or P3 billion in cash and the balance of 70 percent or P7 billion will come in the form of a "soft loan."

The arrangement revolves around PDIC lending some P7 billion to EIB at an interest of one percent on the first year of availment and five percent on the next five years.

EIB, in turn, will be using the P7 billion to purchase high-yielding government securities, which will be held in escrow for PDIC, the source said.

Interest from the government securities, on the other hand, will be accruing for the account of EIB, the source added.

"The interest earned will be used by EIB for its operations. And at the end of the six-year term, PDIC can cash-in the gs (government securities)," the source, privy to the arrangement, said.

The NPAs that PDIC will absorb are part of the assets worth P20 billion that EIB acquired from UBI and Urbancorp Investments Inc. (UII) following the merger of the bank with UBI and UII in 2002.

NPAs are composed of loans that have turned sour and real property owned and acquired or ROPOA.

The transaction is expected to significantly bring down EIB’s NPAs, thus improving its profitability.

"The soft loan is part of its rehabilitation program, now on its fourth year," the source pointed out.

The disposition plus the fresh capital infusion of P3 billion from offshore investors will bring the bank’s capital adequacy ratio "well within" the 10 percent prescribed by the BSP.

EIB announced on January 2 the entry of foreign investors plus infusion from its existing stockholders of some P3 billion, set to be approved by its shareholders in a special meeting this coming January 25.

Businessman and EIB Chair Sergio Ortiz-Luis has explained that the entry of the foreign investors will change the bank’s ownership structure to 6535 percent with the later taking-up the lower ratio.

Local investors, including Ortiz-Luis and existing major stockholders led by Lippo and Yao groups, will now own 65 percent of EIB and will have ten representatives in its 18-man board of directors.

The new equity owners will have 35 percent interest in the bank and five directors. The three others are independent directors as required by the regulators.

In particular, Hong Kong based Lippo Group and the Yao Group represented by Alfredo M. Yao plus other foreign investors, Extra Year Investments Limited, Group of Austria and AO Capital Partners Limited of Hong Kong.

They will put in new money to "strengthen" the bank’s capital base in the light of the effects of the new international accounting standards and the Philippine financial reporting requirements on the capital of banks now being implemented by the regulators.