Local firms seen to retain financial strength

MANILA, Philippines - The financial strength of Philippine corporates is seen to remain strong in the next few years, according to a Standard Chartered Bank report.

The report noted that the government’s investment push has helped and contributed to the strength of corporations in the country.

“As a result, corporates have maintained a prudent financial profile in the past few years. Their leverage has remained around 4.6x, while EBITDA margin is around 16 percent. We expect their credit metrics and liquidity position to remain strong, despite rising capital expenditures in some cases,” it said.

EBITDA (earnings before interest, taxes, depreciation and amortization) is an indicator of the company’s financial performance particularly its current operational profitability.

The strong economic performance of the country is also providing a lift to local companies’ performance.

“The Philippines has been resilient to the global economic slowdown, posting strong gross domestic product (GDP) growth since 2010. Domestic consumption has been a key growth driver. This has helped consumer-oriented corporates such as Alliance Global, Metro Pacific, SM Investments and Megaworld,” it said.

The bank has introduced the so-called Standard Chartered Asia Leverage Evaluator (SCALE) methodology, which is made up of five equally weighted metrics covering factors such as profitability, coverage, leverage and capital structure.

With this, the bank assigned a SCALE of 4.7 for Philippines corporates, which is better than other sub-sectors such as Chinese property (4.4) and Chinese industrials (4.5), and is in line with Indonesian  corporates (4.9).

“A solid local bid makes the Philippines’ corporate sector the least volatile in the Asian space, and probably one of the least volatile sectors in Asian credit,” it noted.

To assess the financial strength of a corporate, Standard Chartered assigns a SCALE score on a 10-point scale.

For each metric, the bank has defined 10 buckets such that the distribution of corporates across the buckets based on their financial metrics follows a normal distribution, with a higher number of corporates falling into buckets 4-7.

“We then assign a SCALE to each bucket (1 = low financial strength, 10 = high financial strength) and aggregate the unweighted SCALE across metrics to determine the final company SCALE. While aggregating, we assign an equal weight of 20 percent to all five factors in order to ensure a simple approach,” it said.

Standard Chartered also applies the SCALE to aggregate the individual company score in proportion to the company’s outstanding amount of US bonds to analyze trends across sectors, countries and rating categories.

“We use a similar approach to calculate credit ratios across the various sub-sectors. We have also created cumulative income statement, balance-sheet and cash-flow metrics for each sector by adding individual company figures, in proportion to their outstanding US bonds,” it added.

In particular, the bank analyzes the financial metrics of 193 Asian corporates that make up 85 percent of the US corporate bond universe.

“We believe credit fundamentals will come to the fore as the external environment normalizes over the next two to three years, leading to wider spread differentiation among credits. The SCALE can be used to analyze credit trends at a sector and sub-sector level. It can also be used to screen credits that have strong (or weak) credit profiles and trade cheap (expensive) for their fundamentals and rating category,” it said.