October 10, 2014

S&P comments on Phil conglomerates debts

Two separate news articles by BusinessWorld and the Philippine Star yesterday reported on the findings by the Standard & Poor’s Rating Services which supposedly raised concerns that some Philippine conglomerates are “highly leveraged.” But if we take a closer look at the articles, the actual quotes by the S&P analysts are not as dire as what the headlines painted. On the contrary, the S&P noted that while debt levels have risen over the years, they see refinancing risks to be “not very high” given that on an aggregate basis the companies are still holding a lot of cash.” BusinessWorld also quoted them as saying “these highly indebted Philippine conglomerates could even withstand the toughest of credit climates, including a rise in interest rates here and abroad.”

Our take: We ran a quick computation on selected Philippine conglomerates to check on their balance sheets. In our computation, we included Ayala Corp (AC), Alliance Global Group (AGI), First Philippine Holdings (FPH), JG Summit Holdings (JGS), Metro Pacific Investments (MPI), SM Investments (SM) and San Miguel Corp (SMC). We note that the aggregate net debt/equity of these companies was at 43% as of 1H14 and little changed from 42% in end-2008. While debt levels have more than doubled during the period in review, their aggregate stockholders’ equity has also expanded by an equal magnitude. Their combined EBITDA is also 1.3x bigger.

We must also highlight that these companies have prudently taken advantage of the opportunities in the past several years to retire or refinance their old expensive debt in favor of low-cost, fixed-rate debts with longer tenors. There was also a change mix in favor of peso debts.

Finally, while the news articles highlighted comments regarding slower revenue growth, we can attribute this to the higher revenue base that these companies have been generating in the past few years when they were reaping benefits from a strong property market and higher trading gains by their banking subsidiaries.

Going forward, we expect growth to be underpinned by continuing diversification into businesses with recurring cash flows (such as investment assets for property holdings, power generation and infrastructure-related assets) and expansion here and abroad that should amply support debt servicing. – WealthSec