Acquisition sprees 'hits credit quality'

Their shopping sprees and the rapid elevation of capital spending in the past two years could likely dent the credit quality of companies in Thailand over the next 12 months, it warned yesterday.

The latest S&P series of reports on 100 listed companies in six Asean countries also found out that most of the larger 20 conglomerates in the Kingdom are piling on debt while earnings slow down.

Most of the large acquisitions over the past two years were debt-funded. This means the risk of losing credit quality along with risk from the expected hikes in interest rates here and in the United States next year would be even greater for companies with higher financial risk profiles.

Acquisitions by the 20 Thai companies, domestically and abroad, particularly in Singapore and Australia, from 2008 to the first quarter of this year were worth about Bt600 billion, which represents almost half of the total acquisitions by the 100 companies that were reviewed by S&P.

This inorganic growth is also seen by companies in the Philippines.

"More and more debt is financing less and less growth and this has been facilitated by the fact that credit is today a cheap and abundant resource. But what if interest rates go up?" said Michael Seewald, managing director and analytic manager of corporate ratings in Asia-Pacific.

Over the past five years, the debt of 100 Asean companies has surged from about US$150 billion in 2008 to $270 billion to date, while revenue and earnings had been growing in tandem until 2011.

But since then, revenue and earnings generation is flattening out or even going downhill, while investments and indebtedness continue to expand.

About 30 per cent of the $270 billion debt, or $40.4 billion, belongs to the 20 Thai companies. About 20 per cent of the debt is in bonds and 80 per cent in bank lending.

The debt of these Thai companies has nearly doubled from 2008 to the first quarter of this year, which is in line with Singapore and Asean as a whole, but faster than in Indonesia and Malaysia.

Growth in cash flows is subsiding. Median revenue growth in this region has fallen from 15 per cent in 2011 to 6 per cent last year.

Xavier Jean, director of corporate ratings in Asia-Pacific, said the pace of acquisitions and capital spending by Thai corporations is among the fastest in Asean – about 140 per cent compared to 90 per cent for Asean from 2008 to the first quarter of this year.

This trend is not confined to large conglomerates but is also observed among slightly smaller companies. Growth by acquisition does have a different kind of risk-reward pattern.

If interest rates rise very rapidly while economies do not recover, this would not contribute to a crisis such as the Asian Financial Crisis in 1997, as the debt level is still lower now than then. Companies are now bigger with larger earnings bases. The Thai domestic banking system is deep with a well-developed bond market.

There is also less reliance on US dollar funding, which means that companies do have a bigger cushion against such a potential crisis, he added.