PSALM: No investment with Lehman Brothers

23 Sep 2010

The Power Sector Assets and Liabilities Management (PSALM) Corporation belied the claim of Eastern Samar Representative Ben Evardone that the privatization firm lost PhP100 million in its deal with an international investment company that went bankrupt in 2008.

PSALM clarified that the deal it entered into with Lehman Brothers Special Financing Inc. (LBFSI) on 18 July 2007 was not an investment but a hedging transaction, specifically a Principal Only Swap (POS), which can be likened to an insurance purchase where PSALM pays an annual expense premium of 2.687% on the notional amount of USD100 million for 19 years. In exchange, PSALM or the government has the right to buy dollars at PhP44.788 in 2028 regardless of the foreign exchange rate at that time. Counterparties for the POS deal were selected based on a comprehensive selection process under the guidance of the Government Policy Procurement Board, the Department of Finance, and the Bureau of the Treasury.

When Lehman went bankrupt, PSALM invoked the International Swaps and Derivatives Association, Inc. (ISDA) agreement, terminated the transaction on 03 November 2008, and replaced it with a new POS with the same terms and conditions. ISDA is a trade organization of participants in the market for over-the-counter derivatives. It is headquartered in New York, and has created a standardized contract (the ISDA Master Agreement) to enter into derivatives transactions.

In addition, PSALM filed for claims in the New York court for approximately USD3.4 million representing the cost of the replacement and other expenses (legal fees, damages, etc) as may be allowed under provisions of the ISDA.

Contrary to Evardone's allegation published in news reports, PSALM did not use the proceeds from the privatization of power assets in the deal, pointing out that until May 2008 it was the National Power Corporation that had paid the required premiums. PSALM made it clear that the hedging transaction was used as an insurance against foreign exchange volatility.

Corporate Communications Division
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