S&P: Debt growth in top PHL companies is the highest in ASEAN

SINGAPORE – Debt at Philippine companies has grown fastest among companies in Southeast Asia, according to the “ASEAN Top Companies” series that Standard & Poor’s Ratings Services published recently.

We estimate that aggregate net debt at the 17 largest Philippine companies nearly tripled between 2008 and the first quarter of 2014. The companies used additional debt mostly to pay for organic expansion and acquisitions over the period as well as to maintain dividends.

The fast growth in debt affected the overall credit profile for the 17 companies reviewed. The median ratio of net debt to EBITDA grew to about 3.5x at the end of 2013 from 1.9x at the end of 2008 because revenues and cash flows have not kept up with rising debt. The Philippines’ median ratio is the highest among the ASEAN countries we reviewed in the survey.

“We expect credit quality to decline further over the next 12 months. We see no sign of a slowdown in spending as Philippine companies continue to invest,” said Standard & Poor’s credit analyst Xavier Jean.

Investment remains geared toward organic growth, but we expect merger and acquisitions to pick up in the country in the next one to two years as large and profitable domestic investment opportunities become more difficult to find.

Top-line growth of the Philippine companies we reviewed remained quite sound compared with that of companies in the other ASEAN countries. However, median revenue growth almost halved to about 8 percent in 2013, versus a peak in 2010 at more than 17 percent, because of increasing competition and greater capacity across industry sectors.

We believe the large conglomerates in the country are most likely to engage in mergers and acquisitions.

“Domestic conglomerates generally have a wide access to debt markets to fund their growth,” Mr. Jean said. “They also have more strategic growth options available because of their broad range of operations,” he added.

The Philippine companies we reviewed displayed a wide variation in funding strategies and financial risk profiles. About 30 percent of the companies had large debt loads (often due to debt-funded spending or acquisitions), and about 25 percent of the companies had conservative balance sheets with moderate to low debt levels.

The companies also had a wide variation in business risk profiles. We view the business risks of most of the largest, most diversified and dominant conglomerates as commensurate with an investment-grade level. A number of companies also had narrower operations, smaller sizes, more volatile margins, or operations in more competitive sectors that weighed down their business risk profiles. – Standard & Poor’s Ratings Services