Credit watchdogs are flagging conglomerate San Miguel Corp.'s energy arm SMC Global Power due to the poor prospect of power plants under its wing amid the still elevated prices of fuel and the company's high level of debts.

After business think tank Bloomberg Intelligence issued a recent assessment about the deteriorating credit profile of the company that "scores poorly for its financial policy and credit metrics," comes another review that cited the volatility of the company's debts.

"Volatility was caused by the continued pressure that SMC Global Power faced on its profits this year due to the spike in input costs, as well as media reports citing the company's financial position," CreditSights, a unit of Fitch Ratings, said in a recent report.

CreditSights, similar to the Bloomberg Intelligence analysis, said the company's financial profile "has continued to deteriorate since," and its outstanding dollar perpetual securities' yields "have widened significantly."

Its advice is not to bet on long-term debt papers of the company maturing beyond 2025.

"We maintain our Sell recommendation on the credit, owing to our outlook for a continued deterioration in SMC Global Power," it added.

SMC Global Power had blamed the rising cost of imported coal and the quickly depleting Malampaya natural gas field for its rising financial distress but industry experts said it was the failure of SMC to head off the effects of problems it should have been familiar with.

The power unit of SMC filed with the Energy Regulatory Commission a petition for rate increases for its power plants that hold straight-pricing contracts which do not allow costs to be recovered from customers as pass-on items in the monthly bills.

The ERC, reminding players in the power industry to honor the terms in their contracts, dismissed SMC Global Power's petition for a temporary P4.80 per kilowatt hour increase in the rates charged by its Ilijan and Sual plants.

Since it has a power supply agreement with Meralco using straight pricing, SMC does not have an option for an abrupt increase in rates although the contract provides for fixed price escalation.

"SMC is constructing a new mega airport near Metro Manila which will further increase its CAPEX (capital expenditure) requirements this decade. Given the worsening financial profile of SMC Global Power, any concerns over its hypothetical default raise fears of triggering a cross-default on SMC," CreditSight's report warned.

SMC's businesses, including power, infra, and cement, require large upfront capital costs and have long gestation periods, the report said.

In a recent company disclosure, the conglomerate said SMC Global Power is purchasing $400 million worth of debt in a tender offer of securities listed in the Singapore Exchange Securities Trading Ltd., or SGX-ST.

An expert called the move an extraordinary redemption that companies resort to in heading off detrimental prospects in their business.

The report added that SMC was affected by the global inflation uptrend and the depreciation of the local currency.

These external factors, CreditSights said, have multiple effects on SMC's income primarily on foreign loans and the purchase of raw materials including fuel, especially coal.

While SMC reported a healthy profit for the first nine months of the year, market players are keeping track of the impact of its highly-leveraged operations.