Corporate News

Companies to feel pinch from weaker currencies

Posted on August 13, 2015

THE Philippines’ largest listed companies, as well as their peers in Southeast Asia, that have piled up huge debts in the last five years -- especially foreign-currency denominated -- face costlier funding as Asian currencies weaken and borrowing costs rise in step with US Federal Reserve rates, Standard & Poor’s Ratings Services said on Wednesday.

In two separate reports released yesterday, the ratings agency warned of tighter credit conditions for companies in the region over the next 12 to 24 months.

The two reports were released at a time when the Philippine peso had been hitting fresh multi-year lows against the dollar, and China’s move to devalue the yuan sent Asian currencies tumbling across the board.

The peso entered P46-to-the-dollar territory on Wednesday and has lost 3.3% so far this year.

“The biggest risks, in our view, are the indirect effect that a further and sudden depreciation of regional currencies may have on the corporate sector,” S&P wrote.

A weakening currency hurts Philippine companies that are most exposed to foreign debt as they have to pay more pesos for every dollar they owe.

Philippine firms, along with Malaysian and Indonesian companies, grew their foreign currency debts “two to three times more rapidly than local currency debt” over the 2010 to 2014 period, based on S&P’s estimates.

“This not-so-unusual currency depreciation is taking place in the context of tougher operating conditions, subdued consumer sentiment, stalling cash flows, and increasingly leveraged balance sheets following years of debt-funded investments,” the global debt watcher said.

The region’s biggest companies, it said, have accumulated debt to bankroll acquisitions and expansions at a pace faster than they grow their earnings. Debt-to-earnings (before interest and taxes) ratio worsened to 3x at end-March this year, from just 2.3x at end-March in 2014, according to S&P’s reckoning.

“We expect the median credit ratios of the largest listed companies to further deteriorate in Indonesia, the Philippines and Singapore in 2015 if companies maintain the same level of capital spending and dividends,” S&P said.

“In those countries, tougher operating conditions, margin pressure, and lackluster revenue growth could also exacerbate expanding debts from elevated capital spending.”

S&P did not name any specific company in its twin reports, only saying it took into account the 100 largest companies in the Association of Southeast Asian Nations (ASEAN) whose credit quality it reviewed last year.

Hedging could cushion the impact of weaker currencies when foreign debt payments become more expensive, but the debt watcher noted that practice has “not yet” become common among ASEAN companies.

“Between 2012 and June 30, 2015, eight companies in ASEAN that issued US dollar bonds that Standard & Poor’s rates and that have no US dollar-denominated revenues hedged their US dollar bonds at least partially, while 10 of them did not hedge,” the report read.

“That is a big change from 2010 and 2011.”

The debt watcher warned companies with short-term debt funding of a likely repeat of the pain from the Asian financial crisis and the US-led credit crunch in 2009-2010.

Currency depreciation, S&P said, “is an issue, in our view, given that ASEAN companies still rely extensively on short-term debt funding.”

It said it expects the Fed to start normalizing US monetary policy before the end of the year.

“In the context of rising rates, companies with a high reliance on working capital lines denominated in US dollars will suffer a double-whammy of higher-base interest costs and the need to generate more cash flows in local currency to repay debt if currencies keep on depreciating.” -- MEIC