Friday 29 Mar 2024
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This article first appeared in The Edge Financial Daily on January 18, 2018

KUALA LUMPUR: S&P Global Ratings expects infrastructure companies in Malaysia, Singapore, Thailand and the Philippines to maintain stronger credit profiles and lower leverage than their Indian and Indonesian peers.

The global rating agency is of the view that credit trends among infrastructure firms in South Asia and Southeast Asia could diverge further from one another, given plans for substantial investments in regional infrastructure.

Capital expenditure (capex) burdens will be a key driver of ratings in South Asian and Southeast Asian infrastructure-related companies amid substantial spending plans.

“[However,] we do not expect that credit profiles will deteriorate for companies operating in sectors with strong regulations, or those with financial cushions in balance sheets to withstand higher capex,” said S&P analyst Abhishek Dangra in a report on “Bridging infrastructure gaps in India and Asean could create credit divides” yesterday.

The rating agency estimates that revenue growth of between 4% and 6% on average and stable earnings before interest, taxes, depreciation and amortisation (Ebitda) margins will support operating cash flows for the 24 infrastructure-related companies it rates in South Asia and Southeast Asia.

As regulations are uneven across industries and countries, some sectors are susceptible to negative surprises that could undermine cash flows, it noted.

“More highly leveraged companies will be more vulnerable to regulatory risks, not to mention other potential stresses, such as rising interest rates or lower-than-expected revenues.

“We believe infrastructure majors with ratios of debt to Ebitda above 5.5 times could face financial pressure. So could companies using a higher proportion of debt [more than three times equity] to fund new investments,” said Dangra.

“By our estimates, leverage will rise for Indonesian infrastructure companies and fall for Indian firms, on average,” he added.

S&P noted that countries in the region are investing heavily to improve the quality and scale of economic growth.

“The region’s power utilities will continue to lead capex, largely on the back of high investments in Indonesia and India. In our opinion, regulatory frameworks will support returns of utilities in most South Asia and Southeast Asia countries amid high capital spending. However, Indonesia and the Philippines face higher regulatory risks in this sector.

“Renewable energy is set for strong growth from a low base, but the financial positions of sector players will remain stretched amid aggressive capex and early-stage portfolios. We foresee strong demand supporting the transportation infrastructure sector, but a slower pickup in volume for ports,” said S&P.

The rating agency also believes that the region’s substantial investments in infrastructure will support growth and development in the region. “Beyond regulatory risks, in the medium- to long-term, infrastructure in South Asia and Southeast Asia also faces risk from disruption and technological advancements,” it added.

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