This article first appeared in The Edge Financial Daily on September 26, 2017

KUALA LUMPUR: Malaysia's non-financial government-linked companies (GLCs) recorded the sharpest deterioration in credit trend among Asean peers since 2011, according to S&P Global Ratings.

Their median debt-to-Ebitda (earnings before interest, taxes, depreciation and amortisation) ratio increased by fourfold in the first quarter of this year as compared to the 2011 level, it said.

“Operating profits and cash flow stagnated or declined over the period for most of these companies, while their capital expenditures and acquisitions stayed elevated,” S&P Global Ratings analysts Xavier Jean and Bertrand Jabouley wrote in a note yesterday.

The note was issued following the release of S&P’s report titled “Spending Splurge Will Test The Strength Of Asean’s Government-Linked Companies”, which contained the findings of its study on 52 selected non-financial GLCs in Malaysia, Singapore, Thailand and Indonesia.

Of the 52, six of the GLCs it studied are Malaysian firms: Tenaga Nasional Bhd, Petroliam Nasional Bhd, Malaysian Airports Holdings Bhd, UMW Holdings Bhd, Sime Darby Bhd, Felda Global Ventures Holdings Bhd, Telekom Malaysia Bhd and Boustead Holdings Bhd.

They also noted that among Asean countries, the median leverage of Indonesian and Malaysian GLCs the rating firm reviewed was “roughly twice that of their non-GLC domestic counterparts in the first quarter of 2017”.

On the debt of the non-financial GLCs it studied, S&P Global Ratings said it is “not yet rising to the point where we believe it could pose a threat to sovereign ratings”.

In Malaysia, it estimated that “the total guarantee exposure of the government is close to 15% of the gross domestic product”.

“The largest guarantees are generally to utilities, and infrastructure and transport firms. A significant proportion of these guarantees are captured under our assessment of Malaysia’s banking sector contingent liabilities as limited,” the rating firm added.

In the report, the analysts also noted that non-financial GLCs seem to have had no trouble so far in funding their growing cash flow deficit, because debt markets remain wide open for them.

“However, amid subdued profit growth and steady dividends, aggregate debt has nearly doubled over the past five years for the 52 large GLCs that S&P Global Ratings reviewed, and their balance sheets have weakened across the board,” it added.

Going forward, S&P Global Ratings said aggregate leverage of Asean GLCs is “likely to creep up and their balance sheets would further weaken through 2018”.

“We estimate that the median leverage of the GLCs we reviewed could marginally exceed three times by the end of 2017, assuming similar cash flows, spending, and dividend levels as in 2016,” it said.

“As investments are often long-dated and do not generate immediate cash flows, we believe GLC balance sheets, which have weakened since 2011, will deteriorate further over the next three years at least,” it added.

The rating firm also believes government support “may be tested”, as growing debt undermines stand-alone credit profiles and could even question the viability of some GLCs.