KUALA LUMPUR: The largest companies in the region are facing rising leverage which will cause them to face the risk of financial distress, debt or corporate restructuring, or default if competition increases or growth slows down.
Standard & Poor’s warned that although major companies in the Asean region are on their growth path, they are increasingly financing a growing gap between cash inflows and investments, acquisitions and dividends, with debt and that could pose a risk.
“The largest companies in Asean sailed through the 2008-2009 crisis relatively unscathed because of their low debt,” said S&P’s credit analyst Xavier Jean.
He said companies are using debt to finance growth and are likely to continue doing that over the next two years.
S&P, in a series of seven reports on the largest companies in the region, also highlight Standard & Poor’s first-ever survey of 100 of Asean’s largest companies by market capitalisation ahead of the 2015 Asean Economic Community initiative.
Standard & Poor’s views Asean conglomerates as a barometer for the region’s economic potential based on their size, rapid expansion, integration within the regional bank and capital markets.
“Because of their greater leverage now, we believe the next global financial shock wave or a scenario of lower growth in China could harm these companies more today.”
According to the rating agency, most Asean companies have enough earnings buffer to absorb a gradual increase in interest rates.
It estimates that these companies have about US$70 billion of debt maturing in the next 12 months, compared with close to US$110 billion in cash balance.
Growth by way of acquisition outside the region will remain high on the agenda of Asean companies seeking to improve their international presence and counter stalling revenues and profits.
“Acquisitions more than doubled for the 100 ASEAN companies between 2011 and 2012, stayed high in 2013 and are on track for a record year in 2014.”
S&P’s estimates that internal cash flows and cash balances could fund only about half of almost US$300 billion Asean’s largest companies spent on expansion and acquisitions between 2008 and the first quarter of 2014.
These companies issued about US$150 billion of additional debt to bridge the gap.
S&P’s said the result of ongoing investment by Asean companies has weakened their credit profiles since 2011, when growth in revenues and cash flows started to wane. –RUPA DAMODARAN, http://www.nst.com.my/node/31946
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