INTERNATIONAL Monetary Fund (IMF) Chief Christine Lagarde lamented last week that the world has “too little economic risk-taking, and too much financial risk-taking.” In the Philippines, there might be both.
Companies in the Southeast Asian nation eager to make acquisitions and capital investments are piling on foreign debt, in the process leaving the economy vulnerable should emerging-market currencies get roiled again.
By year-end, Philippine companies would take as long as a record four years to repay debt using operating earnings, said Xavier Jean, the Singapore-based director of corporate ratings at Standard & Poor’s (S&P). By comparison, the figure is one year or less for Indonesian businesses, and about two years for Malaysian ones. Philippine corporate exposure to foreign debt climbed to 26 percent of total debt last year from 15 percent in 2011, he said, citing a study of 100 Southeast Asian firms.
“The big risk is that they mistime market conditions and they don’t slow down capital spending soon enough before another financial crisis occurs,” Jean said in an interview. “If one of the conglomerates starts facing some financial tightness, you could have confidence issues between the banking system and the conglomerates.”
Concern Europe’s economic woes will hinder a global recovery saw Asian stocks slide to a six-month low yesterday, highlighting the vulnerability of emerging markets to heightened risk aversion among investors. Companies, including San Miguel Corp. (SMC) and Ayala Corp., have been using debt to fund mergers, acquisitions and capital spending as they seek to benefit from an economic resurgence under President Aquino.
Cash flows
“At present, we view refinancing risk as moderate because companies have a lot of cash,” Jean said. “But large cash balances aren’t going to remain there forever if they keep spending the cash they have.”
In a financial crisis, company revenue and cash flows can suffer, creating the potential of short-term debt-repayment problems, he said. In such a situation, banks might not be willing to extend additional lines of credit, he said.
Debt held by the 17 Philippine companies included in the study nearly trebled to $40.7 billion in the first quarter of this year from end-2008, S&P estimated.
Debt surge
San Miguel, the biggest Philippine company, saw its debt surge more than five fold to P631.9 billion ($14 billion) in the second quarter from end-2008 as it expanded into energy and infrastructure, according to data compiled by Bloomberg. SMC President Ramon Ang said in July he’s prepared to spend as much as $10 billion on assets overseas.
Projected profit and operating income “will definitely be able to cover existing and/or any additional debt,” SMC said in e-mailed answers to questions. The company’s financial position is healthy and debt properly managed, it said, citing a net debt to operating earnings ratio of 2.87 times in the first quarter, below its covenant with lenders of 5.5 times. The benchmark Philippine Stock Exchange index has fallen 3.5 percent this month. The peso has fallen about 3 percent against the greenback in the past three months.
“We have to be a bit more cautious especially for companies that have high debt levels” before we make a recommendation to buy, said Lexter Azurin, the head of equity research at Unicapital Securities Inc. in Manila.
GDP growth
The combined revenue of the 17 companies in the study account for about one-fifth of the country’s economy, according to S&P estimates. Philippine gross domestic product increased 6.4 percent in the second quarter from a year earlier, among the fastest in Asia.
The IMF cut its outlook for global growth in 2015 this month even as it expects expansion in the Philippines to remain strong in 2014 and 2015.
SM Investments Corp., which has retail, banking and property units, is preparing for higher global and domestic interest rates and the volatility it could create, Cora Guidote, a senior vice president, said in e-mailed answers to Bloomberg News questions. “SM has been borrowing at fixed rates for some time now,” she said on October 13. “We’re doing business in an emerging economy where volatility is a fact of life. As much as we can reduce risks for the company and for our investors, we would.”
Maturity profile
The median ratio of net debt to earnings before interest, taxes, depreciation and amortization of Philippine companies is estimated to be 3.5 times to 4 times by the end of 2014, from 1.9 times in 2008, S&P’s Jean said.
The companies reviewed had varied financial-risk profiles, S&P said in an October 7 report. About 30 percent had large debt loads, while some 25 percent had conservative balance sheets with moderate-to-low debt levels, according to the report.
Ayala plans to use P4 billion of proceeds from a preferred share sale to refinance debt, instead of funding infrastructure projects, the company said in a statement. “The additional debt that will be refinanced by the preferred shares will help us manage our maturity profile and allow us to fix some of our floating obligations,” it said.
Bloomberg News