SCUTTLEBUTT (05/04/24)

P1.2-T debt bomb ticking

A conglomerate is again on the radar of market pundits after a series of blockbuster purchases and contracts despite being submerged in debt.

The company is notorious for obtaining spectacular contracts by submitting ridiculous commitments or bidding too low in the guise of promoting the public welfare.

Later, however, it would exert its influence and use its financial muscle to change the contract provisions by citing factors such as “change in circumstances” to readjust the terms in its favor. Had the adjusted terms been part of the bid, the company would have certainly lost.

Its cash outlay is projected at nearly P90 billion this year after it recently won a much-coveted deal.

The scuttlebutt is that the corporate giant is wallowing in debt.

A stock trader who gave its shares a sell recommendation said, “It is unclear how the company intends to fund (the recent deal), as the company is already leveraged at 7.5 times net debt-to-EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) as of the third quarter of this year.”

Using the equation, the company’s net debt was estimated at around P1.2 trillion.

The company’s debt, compared to its earnings before income tax, depreciation, and amortization, puts it in a very precarious position in terms of its repayment ability.

Analysts said the company is expected to generate only P216.7 billion in EBITDA next year.

Considering the extraordinary offer it gave the government on one project, the recent contract would set the company back P5 billion in the first year of operations on the single deal.

BSP worried

The high corporate debt levels has prompted the Bangko Sentral ng Pilipinas (BSP) to conduct a probe, the results of which have yet to be disclosed, that is, if the central bank would make it public.

The BSP’s apprehension is rooted in potential overexposure to external risks of the whole financial system. The worry is that if projects funded by overseas loans perform weaker than expected, this could compromise local conglomerates.

Among those flagged is the highly leveraged company.

Standard and Poors issued a similar concern, saying more and more local firms have been taking out debt given its cheaper cost to equity. However, pressures from high global interest rates and the peso’s depreciation versus the US dollar could make debt servicing more difficult.