World Bank notes shrinking credit sources for RP firms

MANILA, Philippines – Despite the improved financial health of the Philippine corporate sector last year, sources of easy credit are starting to shrink, the World Bank said in its latest quarterly report.

It noted that most banks are tightening credit standards and concentrating on larger firms, and external financing is fast dwindling.

In 2008, about $1.6 billion was raised in the corporate bond market, raising yields as the bond market was very active. This was punctuated by heavy issuances led by the record P38-billion issue of San Miguel Corp.

By contrast, the initial public offering (IPO) boom in 2005-2007 vanished as no IPO has yet been undertaken in 2009.

“Difficulty in obtaining external financing is also visible through the reduction in short-term loans (mostly trade credits), which account for a large part of foreign financing and, minimal equity infusions and lack of foreign currency denominated bond issuances in 2009,” the report indicated.

The global financial crisis and economic recession had a particularly sharp impact on a few specific sectors, the WB said.

It said prior to the crisis, exporters, especially multinationals, simply maintained open accounts with their foreign counterparts, while ordinary exporters still relied on letters of credit (L/C) opened by their customers.

Lately, banks had become more selective with respect to industries that are severely affected by the crisis, or whose long-term prospects are not particularly positive.

The industries affected are garments, furniture, small electronics firms, automotive parts, and exporters which do not have the ability to provide collateral.

The sharp rise in government guarantees and credit insurance for the export sector also reflect the credit squeeze faced by the export sector. Banks have also become more discerning among types of companies, the WB noted.

Government-owned and controlled corporations (GOCCs) are also particularly exposed, it added.

The National Food Authority (NFA) and the National Power Corp. (Napocor) have large short-term loans maturing. The NFA must settle its P35-billion debt while Napocor has to grapple with P14 billion.

Firms in the power sector are also exposed to rollover risk as loans to power firms are typically large syndicated loan transactions.

“As economic growth weakens, not only will power companies have to face a more difficult operating environment, they will also have to contend with heightened regulatory risk,” the WB report stated.

Similar to the power sector, steel firms are also exposed to rollover risk. As of 2007, seven of the 20 steel and metal-related manufacturing companies were in the top 100 firms with high short-term loans.

“The prospects for financing may be adversely affected not only by the crisis (and prospects on construction) but also by the poor historical performance of steel manufacturers,” the WB report added.

Prior to the current global recession, the corporate sector enjoyed a favorable operating environment, benefiting from liberalization policies previously put in place and from a booming global economy. Strong net sales coupled with costs containment drove profitability up 40 percent on average between 2000 and 2007; the average return on assets reached nine percent in 2007 compared to five percent in 1996.

While the average debt ratio has been falling since 2003, the 2007 debt ratio (total liabilities over total assets) stood higher than pre-Asian crisis levels (148 against 116 percent, respectively) as firms continued to finance asset growth primarily through debt rather than equity.

Firms, however, have significantly reduced their vulnerabilities by cutting their holdings of short-term loans and foreign currency denominated loans and, with the rapidly appreciating peso in 2007, many firms prepaid their foreign loans. –Ted P. Torres, Philippine Star