01 Dec 2011
The Power Sector Assets and Liabilities Management (PSALM) Corporation has not incurred any losses in its Principal Only Swap (POS) transaction with Lehman Brothers Special Financing Inc. executed on 18 July 2007.
PSALM made the clarification in response to published claims of Eastern Samar Representative Ben Evardone that PSALM had admitted losing USD3.5 million in investments with Lehman Brothers when the latter filed for bankruptcy proceedings in 2008. The allegations resulted from an Invitation to Bid (ITB) that PSALM issued to procure the services of a legal counsel in connection with the transaction.
According to PSALM President and Chief Executive Officer Emmanuel R. Ledesma Jr., the transaction that PSALM entered into with Lehman Brothers was not an investment but a hedging transaction, specifically a POS. The transaction could be likened to an insurance purchase wherein 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," Ledesma pointed out.
Ledesma also stated that when Lehman Brothers filed for bankruptcy three years ago, PSALM had only made two premium payments. In addition, PSALM immediately invoked the International Swaps and Derivatives Association, Inc. (ISDA) agreement upon learning of the Lehman Brothers bankruptcy, terminated the transaction on 03 November 2008, and replaced it with a new POS with the same terms and conditions.
"The replacement is to ensure the continuous protection of PSALM's transaction that it initially made with Lehman Brothers," Ledesma emphasized. "Hence, to say that PSALM lost in the deal is totally inaccurate. In fact, the value of the Lehman swap that was replaced may now be sold in the derivatives market for up to approximately USD12.85 million as of November 2011."
Ledesma further clarified that the reason for the ITB is to tie up loose ends with Lehman Brothers to ensure the continuous protection of PSALM's rights under the ISDA. The legal counsel will help facilitate the claims that PSALM filed in a 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 the provisions of the ISDA.
Strategic Communications and Partnership Division |