The Philippines lost the equivalent of nearly three years of economic growth due to COVID-19. That makes it one of the hardest hit in the region. The pandemic also left its trace on corporate balance sheets with tumbling profits and more debt.

The next challenge is inflation and higher rates. Rising funding costs will weigh on corporate profits, given higher legacy COVID debt. And operating performance is unlikely to be as solid as in rebound-year 2022, with GDP growth slowing to about 5.8% in 2023 and 2024.

Nonetheless, our analysis of 40 large listed Philippine companies shows that funding and liquidity stayed reasonably solid throughout the pandemic: their average debt maturity profile is longer than in other emerging markets such as Vietnam or Indonesia. These companies often hold ample cash balances or, for the larger groups, monetizable equity investments.

S&P Global Ratings has been receiving many questions on the Philippines since its economy recovered from a sharp, COVID- induced drop. In this primer, we examine operations, balance sheet, liquidity, and growth trends of the "top-40".

Nearly a quarter of this sample is made up of large diversified Filipino groups. We note particular interest in these groups, given their economic importance, above average-growth appetite, and often weaker balance sheets. This primer follows a similar survey on Vietnam's large companies (see "Vietnam Corporate Primer: Leverage, Liquidity, And Governance Trends After COVID," published on RatingsDirect on Dec. 1, 2022).

About This Primer

This credit primer highlights the main credit characteristics and trends for 40 of the Philippines' largest listed corporate and infrastructure entities. The themes we review are based on interest shown in our interactions with investors:

• macro, operating and leverage trends;
• capital allocation, growth and financial policy decisions after leverage was stretched during COVID; and
• liquidity and funding characteristics.

We also provide a few thoughts on nine large diversified domestic groups. These groups have been a cornerstone of the country's economic fabric for many decades now, and are even more so now given their massive asset growth and increasing diversification.

Table 1

All major sectors of the economy are represented in the 40 companies we reviewed.   Domestic consumption being the main contributor to GDP, 14 of the companies we reviewed are in the consumer space (consumer products, retailing, telecoms, or gaming). The sample includes seven real estate companies, six infrastructure/utilities companies, three commodities companies, one airline and nine large, diversified entities, often operating in more than one sector.

Company ownership is all private.   The Philippine corporate sector has long been dominated by private companies, unlike in Vietnam or Indonesia where state-owned companies make up a large share of economic activity. All 40 companies in this survey are private firms.

The "big nine" have an outsized influence.   Our sample includes nine large diversified entities: Ayala Corp., San Miguel Corp., JG Summit Corp., Alliance Global Inc., First Philippine Holdings Corp., SM Investment Corp., GT Capital Holdings Inc., Aboitiz Equity Ventures Inc., and DMCI Holdings Inc. Founding families of these nine diversified entities typically maintain either majority or minority ownership, control, and sometimes management involvement. A further 13 companies in the sample are either subsidiaries or affiliates of these nine.

Large Philippine companies are slightly smaller in terms of market capitalization but on par on revenues vs. their emerging Southeast Asian counterparts.   The average market capitalization of the 40 companies we reviewed was roughly half of those in Thailand, about a third smaller than those in Indonesia and about 10% smaller than those in Malaysia (see chart 1). In terms of revenues, they are on par with Indonesian and Malaysian firms, and about half smaller than those in Thailand (which tend to be dominated by large conglomerates or state-owned companies). Like their Southeast Asian peers, the assets and revenues of most Philippine companies we reviewed are concentrated in their domestic markets, with few exporters beyond the commodities sector.

Chart 1

The Macro Setting: Inflation Will Complicate The Economic Comeback After COVID Wiped Out Nearly Three Years Of Growth

The Philippines was hit hard by the pandemic, but also recovered fast (see chart 2). The final easing of COVID-related containment measures last year stimulated domestic economic activity, especially in the manufacturing, consumer and mobility sectors. GDP growth accelerated to 7.6% in 2022, at the higher end of its Southeast Asian counterparts.

Inflation is now complicating the picture. GDP growth slows to 5.8% in 2023 and 5.8% in 2024 in our base case. That gives it the second highest growth rate in Southeast Asia (after Vietnam). But also, among the highest domestic headline inflation (6.2% in 2023 by our forecast) in Asia-Pacific. This level well surpasses the upper bound target of 2%-4% set by the central bank, Bangko Sentral ng Pilipinas (BSP). BSP raised rates multiple times over the past year as a result. Sizable inflation and higher interest rates have started to weigh on household spending power in the country, constraining private demand prospects.

Chart 2

COVID-Scarred Corporates Face A New Culprit: Inflation

Philippine companies suffered deeply during COVID, and by our estimate, nearly 40% still had lower profits in 2022 than in 2019. Their recoveries are now complicated by inflation and the country's slowing economic momentum.

Looking first at the COVID scars:

Median revenues in 2020 vs. 2019 declined 13% for the 40 companies we reviewed   (see chart 3). Median profits declined nearly 20%. That brought average profit levels back to 2017 levels, one of the sharpest pullbacks in Southeast Asia's corporate sector.

The performance drop was widespread at the large Philippine companies we reviewed.   This contrasts with large companies in Indonesia or Vietnam, some of which were exposed to sectors, such as commodities, that performed reasonably well during 2020 and 2021. Among the Philippine 40 we reviewed, median revenues dropped nearly 30% in the real estate sector in 2020 amid weaker demand, lower sales, and price discounts. Revenues declined a more moderate 13% for utilities. The consumer sector was more resilient, with revenue edging down 2% and median profits down about 7%.

The large diversified groups were also less resilient in 2020 than we would have expected given their size and diversification.  The median consolidated revenues of the nine groups in this primer dropped nearly one-quarter in 2020. Median profit fell more than one-third, generally because of large legacy exposures to one or more of the more affected sectors (real estate, airlines or mobility-dependent retailing or consumer sectors).

Chart 3

New challenges for 2023-2024

Revenue and profit growth are likely to slow to mid- to high-single digits over the next two years.  We believe the bulk of the post COVID recovery has already materialized, especially in the real estate and consumer sectors. The data indicates lingering damage: nearly 40% of the companies we reviewed still had lower profits in 2022 than in 2019 despite median profits in 2022 climbing about 30% from their 2020 lows.

We estimate the median margin across the 40 declined to roughly 22% in 2022 from about 27% in 2019. Headline inflation of 6.2% in 2023 is likely to keep profit margins in check.

Capital Structures: Leverage Has Crept Up And Credit Quality Is Diverging

Balance sheets and credit profiles are weaker.   For the 40 Philippine companies we reviewed, the median ratio of gross debt to EBITDA has increased to about 3.6x in 2022 from roughly 3x in 2018.

Credit polarization has grown.  A third of the 40 large companies we reviewed had a ratio of gross debt to EBITDA of more than 5x in 2022 (see chart 4), about twice the proportion of five years ago. The share of companies with conservative capital structures (with a ratio of gross debt to EBITDA of less than 2x) has marginally reduced to 28% from 30% five years ago.

Chart 4

The profit drop during COVID is undeniably a major factor in rising leverage, a trend seen in Vietnam and Indonesia. Median reported debt grew 12% in 2020 at the peak of the pandemic amid falling profits. Yet spending appetite, growth aspirations, and shareholder distributions resumed in 2021 and accelerated in 2022 for the Philippine sample. This has limited recent balance sheet consolidation.

The balance sheets of the nine larger groups we reviewed have significantly more leverage and deteriorated faster than those of smaller companies over the past five years (see chart 5). For those nine, we estimate the median ratio of consolidated gross debt to EBITDA to be about 7x, compared with a little over 3x for the rest of the listed companies in this sample.

Their consolidated interest coverage ratios are also sharply lower. These nine had a median EBITDA interest coverage of about 2.9x in 2022, compared with 6x for the others.

Chart 5

Leveraged financial policies have become more widespread

Financial policies have tilted more aggressive over the past five years, as cheap funding costs and solid growth prospects stimulated investments and acquisitions (see chart 6):

• 17 companies (about 43%) have maintained consistent capital structures. Resilient earnings and low legacy debt levels in consumer-focused sectors and solid commodity prices at Nickel Asia or Semirara allowed them to maintain solid balance sheets despite capital spending or dividend payments.
• 15 companies (about 37%) have increasing gross leverage. The rise is moderate for Globe Telecom, Meralco, PLDT, AREIT, Wilcon Depot. It is more significant for Ayala Land, Jollibee, JG Summit, SM Prime, Golden MV, D&L Industries, Manila Water because earnings growth has not kept up with debt-funded growth.
• Eight companies (20%) have strengthened their capital structure, generally through a combination of earnings growth, reducing capital spending or debt repayment.

Chart 6

Balance sheets appear slightly less leveraged on a net debt basis

Large Philippine companies entered the COVID period with generally ample cash, like their large Vietnamese or Malaysian counterparts. That cash depleted during the pandemic but remain sometimes significant compared with reported debt. The leverage picture, while still weaker than before COVID, is slightly less negative after netting cash from reported debt (see chart 7). The net debt to EBITDA ratios are stronger by an average of 1x for 15 out of 40 companies and about 2x for four companies (hospitality group Bloomberry Resorts, retailers Robinsons Retail and Puregold Price Club, and spirits manufacturer Emperador).

Chart 7

Large Philippine companies are not heavily exposed to currency fluctuations

The nearly 20% depreciation of the Philippine peso against the U.S. dollar over the past 18 months is unlikely to pose a major direct risk to corporate credit quality, in our view.

About two-thirds quarters of the companies we reviewed in this primer only fund themselves domestically, generally through the domestic banking and bond markets.  Foreign-currency funding is concentrated to a few companies using trade finance for the purchase of U.S.-dollar denominated raw materials or energy (foodstuff, cyclical transportation), or in the power and port infrastructure sector.

A few of the large diversified companies have tapped foreign currency funding--such as U.S.-dollar linked subordinated securities or syndicated bank loans. But those are generally limited to a maximum of a quarter of the total funding of these companies.

However, peso depreciation is adding to margin compression for sectors exposed to U.S.-denominated raw materials and energy costs (building products, power, agribusiness, transportation cyclical).  To date, the power-generation sector has felt this the hardest. The median margins of power companies we reviewed nearly halved over the past three years as a weaker peso compounded rising fuel costs.

Capital Allocation: Growth Aspirations Are High, And So Is Shareholder Remuneration

Besides the pandemic-induced profit drop, steady investments, active acquisition strategies, and shareholder remuneration are the main contributors to the comparatively high legacy debt stock of the large Philippine companies.

Half of the 40 companies we reviewed had negative discretionary cash flows in 2022 (including spending and shareholder distributions), most of which was financed with additional borrowing rather than cash balances.

That trend of sustained investments and dividends also seems well entrenched. That proportion of companies with yearly cash deficits fluctuated between 50% and 66% over the past five years. About half of the 40 companies had three or more years of cash deficit in the past five years. The stronger figure in 2022 is largely cyclical, in our view, because of the earnings improvement post COVID.

Capital spending is proportionally higher than regional peers

Large companies in the Philippines have been among the most active spenders in the region, seeking to take advantage of relatively modest GDP per capita, a sizable population, rising incomes, and infrastructure needs.

Rather than just focusing on real estate and construction like in some countries at a similar stage of economic development, corporate investment in the Philippines percolated through all major economic sectors--infrastructure, power, real estate, retailing, telecom and branded consumer products. As a proportion of EBITDA, capital spending averaged about 50% between 2018 and 2022, more than double that for the large Vietnamese companies we recently reviewed.

The fast recovery in capital spending and acquisition activity post-COVID suggests that growth remains top of the agenda as operations normalize.  Aggregate capital spending and acquisition dropped about a third in 2020 at the peak of pandemic uncertainty. Yet spending as a proportion of EBITDA actually crept up to 47% from 45% in 2019 (see chart 8). Since then, investment activity resumed--2022 aggregate capex and acquisitions were about 65% higher than in 2020, though spending as a proportion of EBITDA reduced given the post-COVID earnings recovery.

Chart 8

Shareholder remuneration is picking up.  Shareholder distributions as a share of earnings stayed stable throughout COVID but have picked up since. As a proportion of the previous year's EBITDA, distributions in 2021 were at a multi-year high of 24%; a trend that continued in 2022. Like in Vietnam, shareholder distributions tend to be a more relevant credit consideration for companies with moderate leverage: the 12 companies distributing more than 30% of their EBITDA to shareholders had a median gross debt-to-EBITDA ratio of only 1.5x.

The presence of (sometimes sizable) minority interests reduces pay-out flexibility for some of the large diversified groups in times of operating headwinds because subsidiaries may continue paying dividends. We estimate that dividends to minority shareholders accounted for an average of about 45% of all shareholder distributions across the nine large diversified groups we reviewed in this primer. Groups such as San Miguel Corp., JG Summit, or DMCI Holdings in particular have sizable minority interests in their corporate structures.

Funding And Liquidity: A Credit Positive

Unlike some of their balance sheet attributes, most liquidity indicators we reviewed for the large Philippine companies point to a relative credit strength.

The following attributes lower the risk of a major liquidity crisis in the next two to three years even as funding costs increase and regional funding stays selective.

• Debt tenors tend to be long.
• Companies favored low-cost borrowings to fund growth rather than using cash.
• The larger diversified groups also own equity stakes in affiliates or non-strategic investments they can monetize to beef up liquidity.
• The conversion of profits into internal cash flow has been solid over the past few years, thanks to moderate working capital build-up.

We see two relative weaknesses to the funding structure of large Philippine companies. First, they still predominantly fund domestically despite growing funding diversity in recent years. Second, the affiliation between the country's largest banks and the large diversified groups increases event risk and could accelerate contagion risk; even if that affiliation has reduced over the past few years.

Large Philippine companies tend to have long debt tenors

As of Dec. 31, 2022, the average ratio of short-term debt to total reported debt was about 27% for the 40 companies we reviewed.  Unlike in Vietnam and Indonesia, that ratio has actually declined from about 33% in 2018 as companies took advantage of still favorable long-term interest rates to lengthen maturities. As of year-end 2022, short-term debt represented less than 25% of total debt for about two-thirds of the 40 companies reviewed. The share of companies with short-term debt representing the majority of their borrowings nearly halved in the past five years to 13% (see chart 9).

We estimate the weighted average debt tenor for the 40 companies to be between three and four years.  That's comparable to the tenors of large Malaysian and Thai companies, and more than double the length of the 25 large Vietnamese companies we reviewed in our recent survey.

Chart 9

Companies with a high share of short-term debt also tend to have less leverage…

Liquidity remains sound on balance, though years of accumulated cash deficits has broadly eroded cash balances. A majority (60%) of the companies we reviewed still had sufficient cash on hand at the end of 2022 to repay debt maturing in 2023, without counting excess cash from operations or short-term investments and shares in equity affiliates. This was about 75% back in 2018.

The five companies with comparatively higher reliance on short-term debt (>50% of their debt mix) also had conservative balance sheets (see chart 10).

Chart 10

…while the conversion of accounting profit into cash has been fairly solid

Elevated spending activity and demand expansion often requires significant investment in working capital, which in turns reduces operating cash flows available for debt servicing. This has been the case in most fast-growing emerging markets in Southeast Asia, and an issue becoming more critical in certain working capital intensive sectors such as real estate, construction, retailing or light manufacturing.

Working capital management appears to be less of a problem for the Philippine companies we reviewed in this primer. To be sure, the revenue and profit growth still required investments in working capital, longer payment terms, and inventory build-up (see chart 11). Yet, companies have been able to reduce working capital consumption in 2022 as operating conditions picked up.

Chart 11

Moderate investment in working capital helped convert more accounting earnings into cash and partly offset the effect of resuming investments and steady shareholder returns. By our estimate, 70% of the companies we reviewed converted 50% of more of their accounting EBITDA into cash in 2022 (see chart 12). That's a sharp recovery from 2021 where most of the working capital investment was concentrated, and only marginally lower than pre-COVID.

Chart 12

Funding remains available at domestic banks, less so in the domestic bond market

The banking sector is the primary source of funding for Philippine large companies and has been a reliable provider of credit over the past decade.  Annual credit growth before COVID averaged 13% to 15%, about 1.5x nominal GDP, and nowhere near the boom-and-bust credit growth at Vietnamese banks. Credit growth in the Philippines resumed in 2021 after a modest contraction in 2020. We project an annual credit growth of 7%-9% over 2023-2024.

Lending to large corporations accounts for the bulk of bank loan books.  Exposure to micro, small, and midsize enterprises (MSMEs) stayed below 10% of total loans over the past several years. This, combined with generally solid capitalization and adequate provision of nonperforming loans, has kept risk premia reasonable; and allowed Philippine companies to fund at relatively competitive rates even during periods of market turmoil and at longer tenors.

Some of the larger diversified groups in the Philippines have banking operations or are major shareholders in banks (see table 2).  We regard this affiliation as a moderate system weakness. Related party lending is often limited and generally well-disclosed. But a sharp deterioration in the credit profile or capitalization of either a group's banking subsidiary or affiliate, or the group itself, could induce event risk, accelerate contagion effect, and tighten funding availability to the large corporate sector. We believe this risk will persist as long as leverage at the country's largest companies remain elevated.

Table 2

Domestic capital markets remain shallow for the corporate sector.  The total local currency bond market represented about 55% of GDP according to data from the Asian Development Bank's Bondonline database. But over 80% of the bonds are government or government-linked securities, with corporate issuances representing less than 10% of GDP, on par with Vietnam and Indonesia and far below Thailand, Malaysia and Singapore.

The domestic bond market is also dominated by the large diversified groups and their subsidiaries and affiliates; and the banks. The top-30 issuers account for nearly 91% of total non-government issuances, according to the March 2023 release of ADB's Asia Bond Monitor.

Chart 13

Philippines top-40: Funding diversity is three tiered

We grouped the 40 companies we reviewed according to their funding diversity, based on the debt composition as disclosed in the notes of their latest financial statements.

• Funding channels are concentrated for about a third of these 40 large companies, with either reliance on a few single bank lenders or concentrated exposure to domestic capital markets.
• Another third fund predominantly domestically, but with a longer record of accessing a wider pool of bank lenders and domestic capital market access.
• We regard funding diversity for the last third of companies to be on par with the funding diversity of some of the largest Southeast Asian companies outside of the Philippines. These companies, which include all large diversified groups, have a wide access to the domestic banking and bond market but also diversified in international capital markets, with a greater pool of foreign bank lenders.

Chart 14

A Spotlight On The Large Diversified Groups

Industrial conglomerates or investment groups?

The fast growth and rising sector diversity of the nine large diversified Philippine groups we reviewed in this primer (see table 3) raise interesting credit questions. Do their increasing investment activities make them more akin to investment holding companies or more like the large diversified industrial companies and conglomerates typical of other emerging Southeast Asian countries?

Table 3

Investment holding companies (IHCs) we rate generally have a goal of generating capital appreciation by investing in assets they believe will appreciate in value, and maximize portfolio value. They periodically rotate assets to realize capital gains and generate funds for reinvestment. Other typical characteristics are included in the side bar below.

We treat most rated diversified groups across Asia-Pacific as conglomerates. That's because of one or more of the following attributes: shared names or name association within the group, centralized funding and operating infrastructures, shared corporate stories, shareholding control, management involvement across the group, limited asset rotation, cross-divisional financial support, and/or cash fungibility within the group.

Examples of these companies are PT Astra Indonesia Tbk., Jardine Matheson Holdings Ltd., CK Hutchison Holdings Ltd., and Swire Pacific Ltd. in Hong-Kong; or Wesfarmers Ltd. in Australia. All aim to increase shareholder value by growing earnings and cash flow from their operations.

The majority of the nine large diversified groups included in this Philippine primer seem to have in common the following characteristics:

• Management control or influence in their most valuable listed equity investees given majority or near-majority stakes.
• A few large equity investees.
• Uncommon asset rotation or monetization of the largest equity investees (divestments generally limited to smaller, non-strategic legacy affiliates).
• Name-sharing, a strong association with the parent company, or long shared corporate history.
• Either centralized funding and treasury management, common funding strategies, and, for some, related party lending between the parent company and key subsidiaries, guarantees or debt at the parent secured on subsidiaries' assets or cash flows.

We also believe most of these large diversified groups will have an incentive to support weaker group members to keep steady access to funding and reduce reputation risk in domestic banking and capital markets.

More leverage…

For conglomerates, we view leverage as high if the debt-to-EBITDA ratio exceeds 5x and are likely to assess a capital structure as aggressive if the underlying operations are less stable through an economic cycle. There were six such entities in the nine large diversified Philippine groups we reviewed.

Parent-only and subsidiary-level leverage also differs significantly. At about 2.8x on a gross debt basis, and about 1.5x on a net debt basis as of year-end 2022, the median debt-to-EBITDA ratio for the 13 listed subsidiaries or affiliates of the large diversified Philippine groups was two to three times lower than the consolidated leverage of their underlying group. That's a noteworthy trait of large groups decades in the making across emerging Southeast Asia (see "ASEAN Top Companies: Watch The Conglomerates," Sept. 9, 2014). Parent companies took on additional debt to build new ventures, strengthen weaker subsidiaries or simply service their own debts, while seeking to preserve the credit quality of their most important subsidiaries.

For large diversified groups, high parent leverage heightens the dependency on dividends from subsidiaries and affiliates. Significant minority interests in subsidiaries with low leverage could overstate the strength of the group based on consolidated ratios, while compounding structural subordination risks.

… But more options

Whether assessed as IHCs or conglomerates, the current structure of large diversified groups in the Philippines allows them to monetize stakes in smaller or less strategic investments. For example, JG Summit sold shares in power company Manila Electric Co. for Philippine peso (PHP) 12.4 billion ahead of a bond maturity in January 2023--while maintaining a significant--and valuable--minority stake in the company.

Equitization of affiliates or subsidiaries can bring in additional funds that also can be deployed to bolster liquidity within the group. We would view this flexibility as a credit strength if nonstrategic stakes can be monetized rapidly with proceeds applied to strengthening the balance sheet.

Furthermore, some lowly leveraged subsidiaries with stable cash flows have proven to be reliable dividend distributors with steady operating cash flows and moderate reinvestment needs, especially those in the consumer product sector (URC, Emperador, San Miguel Food & Beverage).

We also generally associate larger size and diversity with improved growth options and better operating stability in the longer term. That expected diversity did not fully play out during COVID given the country-wide restrictions affected virtually all sectors. Yet, we would expect more profit and cash flow stability during a more "normal" economic slowdown, especially from groups with diverse exposures into less-correlated sectors such as utilities, consumer products, infrastructure, and manufacturing. The next downturn will be a test of the stability and success of these group's multi-year (and expensive) diversification strategy.

Editor: Cathy Holcombe

Digital design: Evy Cheung

Related Research and Criteria

Research

• Economic Outlook Asia-Pacific Q2 2023: China Rebound Supports Growth, March 27, 2023
• SLIDES: Philippine Banks In 2023: Profitability To Hold Up Amid Slower Growth, March 8, 2023
• Vietnam Corporate Primer: Leverage, Liquidity, And Governance Trends After COVID, Dec. 1, 2022
• Philippines 'BBB+/A-2' Ratings Affirmed; Outlook Stable, Nov. 16, 2022
• Banking Industry Country Risk Assessment: Philippines, Aug. 12, 2022
• ASEAN Top Companies: Watch The Conglomerates, Sept. 9, 2014

Criteria

• Methodology: Investment Holding Companies, Dec. 2, 2015