ASEAN's corporate credit quality stabilising, but don't be lulled: S&P

September 26, 2017

SINGAPORE - For the first time since the end of the global financial crisis, the credit quality of the largest listed companies in Southeast Asia seems to be stabilising, according to two reports S&P Global Ratings released today. It says corporate credit health in the region has been boosted by an earnings recovery rather than debt reduction.

One report points out that companies within ASEAN have kept investing and remunerating shareholders in the past year, leaving balance sheets exposed if economic indicators reverse and lender support wanes.
But credit conditions have stopped deteriorating, it says.
“For the first time in more than five years, the median debt-to-EBITDA ratio for 150 of the largest listed companies in ASEAN have stabilised at about 2.5x, with EBITDA interest coverage remaining consistent year-on-year at about 7.0x.
“Corporate confidence has also recovered from 2015, on slightly improving economic outlook, stabilising regional currencies, and firmer commodity prices.
"Revenue growth doubled to 5% in 2016 for large companies in ASEAN, amid stable operating margins," said S&P Global Ratings credit analyst. Bertrand
"Excess cash after investments and dividend allowed them to control leverage, despite still-high spending appetite and sticky shareholder remunerations."
Sustainability of the improved credit picture is uncertain, however, the report says.
Companies in the region have continued to be active net borrowers over the past 12 months, with absolute net debt growing by about US$10 billion, a 4% annual increase, at the 150 companies reviewed in the region. Name-lending also remains a widespread practice throughout the region.
"Most large companies in ASEAN seem to behave like Mr Joe who bought a property and took an interest-only mortgage, hoping that an increase in the property valuation reduces the loan-to-value," Jabouley said.
"Corporate credit health in the region looks better, but that is because of higher profits, not decisive initiatives from management teams to save for the rainy days."
Geographic differences in balance sheet quality remain, according to the report.
Although leverage at Singaporean companies is stabilising, it remains unrivalled in the region with a median debt-to-EBITDA ratio exceeding 5.0x. At the other end of the spectrum, Indonesian corporates have maintained stable leverage below 2.0x.
In between, median leverage at large companies in the Philippines, Malaysia, and Thailand continued to tick up, increasing to above
3.0x for the Philippines, and 2.5x for Thailand and Malaysia.
“Credit outlooks also vary across sectors. We have observed the most significant improvements in the resources sector, while credit quality in the telecommunications sector and that of large conglomerates across the region continue to deteriorate.
“As opposed to private companies, credit quality at Government-linked companies is worsening and they are among those in the region whose debt and spending have grown fastest.”
In the second report, S&P Global Ratings analysed the credit conditions in the Government-linked corporate sector with a sample of 52 companies across ASEAN.
“We estimate their aggregated net debt nearly doubled between 2011 and 2016, with annual spending growing about 40% over the period,” it says.
“Cash flow deficits have widened, with the median ratio of debt to EBITDA nearly trebling in five years to about 3.0x currently. Debt at Indonesian and Malaysian GLCs has grown fastest, amid sizable investments and sometimes large dividend payments.
"Government-linked companies are now the driving force of corporate spending in the region," said S&P Global Ratings credit analyst Xavier Jean.
"But we believe the GLCs will face increasing difficulty reconciling governments' pressure for investments with financial discipline."
The report said the deterioration in the balance sheet of GLCs has not yet compromised their access to funding, given government affiliation and creditors' expectations of extraordinary support in case the GLCs need it. (ATI).