Asean listed companies’ debt burden at all-time high

A Investment Management said despite the volatility in the markets and concerns over the trade wars,

KUALA LUMPUR: Sound liquidity and high cash balances will provide a buffer against growing external headwinds and all-time high corporate leverage in Asean, according to S&P Global Ratings.

“The credit quality of Asean’s corporate sector is weakening again as capital spending resumes after three years of decline.

“That spending growth coincides with slowing earnings growth, pushing debt at listed companies in Asean to an all-time high of nearly US$700bil,” said S&P Global Ratings credit analyst Xavier Jean in a statement.

The findings are based on two articles published by S&P Global Ratings, titled “Credit FAQ: Asean Companies Maintain Good Liquidity Despite A US$700bil Debt Load” and “Asean Conglomerates Continue Investing In Growth At The Cost Of Leverage.”

The FAQ article is based on the analysis of nearly 2,400 listed companies in Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam.

The ratings house said the stabilising trend in leverage it had observed in 2017 now seemed more temporary than structural.

It noted that Asean companies now take on average 3.7 years of profits, assuming no investment, taxes, or dividends, to repay debt, from 3.4 years in 2017 and about two years in 2010.

The leverage level, it said, could increase to four years in 2019, assuming similar trends in earnings, capital spending, dividend, and cash deficits to those observed since the beginning of 2018.

“That’s a high level of leverage for most industrial sectors, in our view,” it said.

It said renewed business sentiment and favorable commodity prices were fueling capital spending, particularly in the commodities, consumer, and infrastructure segments and, more broadly, at companies in Indonesia and Thailand.

Companies are now spending an average of 80 cents for each dollar of cash they generate, compared with about 60 cents in 2016.

However, more spending is buying less growth, with returns on capital now in their seventh consecutive year of decline across the region.

It added that leverage in the corporate sector has increased in almost every country, except Indonesia, where it is slightly decreasing amid higher earnings in  commodity-related sectors. Corporate leverage as a proportion of profits is at multi-year highs in Vietnam, the Philippines, Singapore, and Thailand.

Listed companies in Singapore remain the most leveraged in Asean.

However,liquidity and the availability of funding are not yet credit concerns for the corporate sector, at least in the next 12 months, it said.

“Reliance on confidence-sensitive capital markets for finance is  moderate with nearly 75% of the companies reviewed rely on bank loans or more sticky working capital credit facilities for all their funding,” it said.

The FAQ article also highlighted that half of the companies reviewed had enough cash and annual EBITDA to cover 1.5 times short-term debt maturities and interest expenses, a marginal erosion from about 1.6x in 2017, 1.7x in 2014, and 1.9x in 2010.

“This headroom provides the companies good resilience against rising funding costs, assuming they prioritise liquidity management over accelerating investment growth,” it said.

The ratings house said the repercussions of high leverage for Asean conglomerates could be far reaching.

It said the companies will likely continue to aggressively pursue debt-funded expansion, which will keep leverage high, if not further increase it.

“Conglomerates’ liquidity remains sound, but lending concentration could become an issue at some point,” said S&P Global Ratings credit analyst Bertrand Jabouley.

“ASEAN conglomerates are systemically important in a number of countries, given their high and rising concentration in local bond markets and at banks.

“This means any large-scale stress could lead domestic lenders to question their so far unconditional support and could have a domino effect on local capital markets.”