ASEAN meltdown: Singapore’s largest publicly traded companies at risk of default

Southeast Asia is suffering from critical debt levels and weak profitability.

Debt-to-earnings ratios rose last year at the fastest pace since 2011, as average return on capital at the biggest firms by market value fell for the first time since 2008, according to data compiled by Bloomberg. In the past four years, their debt rose 89 percent to the equivalent of $501 billion.

A report by Bloomberg reveals that average economic growth in Indonesia,Malaysia, Singapore, Philippines,Thailand and Vietnam fell to just under 5 percent last year from 8.5 percent in 2010, forcing companies to rely more on borrowing than earnings to finance their investments. Outbound acquisition activity from the Asean region has tripled in the past five years as companies sought growth abroad.

“More and more debt is financing less and less growth,” Singapore-based Xavier Jean, a director of corporate ratings for Standard & Poor’s, said in a Sept. 11 interview. “The only way for these companies to keep growing seems to be leveraging up.”

S&P released a study last week that said the escalating debt levels among Asean’s blue-chip companies will increase vulnerability when interest rates start to rise. Internal cash flows and cash balances funded only about half of the $300 billion the region’s largest companies spent on expansion and acquisitions between 2008 and the first quarter of 2014, S&P said. About $150 billion of debt was issued to bridge the gap.

Here’s more from Bloomberg:

Bigger, listed companies typically take on more debt at a faster pace than their private sector counterparts, S&P’s Jean said. That’s partly due to the cheaper cost of funding they’ve enjoyed over the last five years.

U.S. dollar borrowing costs have averaged 4.92 percent since September 2009, JPMorgan Chase & Co. indexes dating back to 2005 show. They averaged 6.70 percent the four years before that and climbed as high as 11.13 percent during the global financial crisis. Costs have risen 14 basis points this month, to 4.75 percent on Sept. 12.
“As rates rise, these debt payments are going to become more expensive,” Jean said. “We’re calling attention especially because we’re seeing a lot of U.S. dollar bond transactions at very tight prices.”