Over-leveraged conglomerate

A number of businessmen and a few bankers have admitted feeling very uneasy about the heavy volume of borrowing between some companies and local bank affiliates, recalling the lessons of the 1997 Asian financial contagion and the 2008 global crisis whose effects continue to be felt by many countries today. It can be recalled that credit ratings firm Standard & Poor’s had issued a report last year warning that the Philippines – despite being one of the strongest markets in the region – could suffer a downgrade if a debt default by one of the major conglomerates in the country could result in the erosion of investor confidence. 

This was the same warning issued by the International Monetary Fund in its country report issued last year that the economy would be at risk if a “highly leveraged conglomerate” would default on its foreign obligations and/or domestic loans. The S&P and the IMF, however, did not specify a particular conglomerate, but many are starting to wonder what would happen if certain “too big to fail” conglomerates become overburdened by debts or if certain affiliates or subsidiaries turn out to be poorly managed, causing serious financial problems. And since these too big companies cannot be allowed to fail because it could trigger a recession, government will be forced to bail them out using Filipino taxpayers’ money – similar to what happened in the US with its $700-billion Wall Street bailout plan in 2008 for troubled companies that were deeply buried in bad debts.

In one of his columns last year, our friend, former ambassador Bobbi Tiglao, wrote about an unnamed highly leveraged conglomerate, explaining a possible scenario of financial panic if the said over-leveraged conglomerate failed to service its loans. Bobbi quoted the IMF report that noted that the BSP’s “recently strengthened governance requirements” for banks showed that these financial institutions have “large exposures to consolidated clients,” and that investigations are being conducted to unearth the “corporate layering” of certain conglomerates to go around banking regulations regarding the “single borrowers limit” or SBL.

Per banking regulations, loans extended by a bank to any individual or entity should not exceed 20 percent of the bank’s net worth (though the limit has been raised to 25 percent over the years). This was to prevent banks from extending huge loans to a single borrower to the point that a default from the borrower could result in bank failure.

In his column, Bobbi Tiglao also quoted a source as saying, “It’s been quite obvious that this conglomerate, which has been expanding too rapidly is doing so through the huge bank loans, and we can’t figure out how it is complying with the SBL.” The IMF report had noted that the relaxation of the SBL for petroleum and PPP loans has further expanded the access of conglomerates to credits – which could eventually pose risks for the economy.

During a Manila Rotary meeting early this year where he was guest speaker, BSP (Bangko Sentral ng Pilipinas) governor Amando “Say” Tetangco admitted they are conducting a closer scrutiny on the nature of transactions between banks and the affiliates/subsidiaries of a conglomerate to assess the potential impact on the economy, noting the complex structures within conglomerates with companies and subsidiaries being interlinked with one another.

In a recent interview with TV5 news portal Interaksyon.com, BSP Deputy Governor Nestor Espenilla said the BSP wants to examine the material transactions between a bank and other entities within the conglomerate it belongs to in order to understand the potential implications to the soundness of the financial institution. Espenilla admitted that they are looking at the loan transactions’ potential impact since the capital can be recycled through the conglomerate.

Some of our sources noted that the BSP’s moves seem to be in reaction to the IMF’s warnings, with the global lending institution also asking the BSP to investigate if the loans by the conglomerate purportedly for oil purchases or public-private partnership (PPP) projects were being diverted into other ventures.  According to our source, the IMF is reportedly set to issue a stronger warning, noting the increase in the country’s corporate debt.

Despite IMF warnings about the possible debt problems of the conglomerate saying a recapitalization should be ordered to prevent credit contractions, the Bangko Sentral insists there is no need to tighten SBL regulations, saying the debts are well managed. Let’s just hope the IMF will not have occasion to say, “I told you so.”

Spy tidbits

–– Spy Bits received reports that Ruby Chan Tuason – the former social secretary of former president Joseph Estrada who is being charged in the P10 billion pork barrel fund scam allegedly engineered by Janet Lim Napoles  – has reportedly agreed to turn state witness against Senator Jinggoy Estrada and Gigi Reyes, the former chief of staff of Senate Minority Leader Juan Ponce Enrile. Tuason is also implicated in the Malampaya fund scam, with whistleblowers claiming she received more than P240 million in alleged kickbacks. We tried to get a confirmation from our source at the DOJ but only got a “no comment” reply to our text message. 

–– Karl Slym, the British managing director of Tata Motors died Sunday after reportedly falling from the balcony of the Shangri-La Hotel in Bangkok where he was billeted while attending a board meeting in the carmaker’s unit in Thailand. Reports are still sketchy as to how the executive could have fallen from the 22nd floor of the five star hotel, although unconfirmed reports claim that a suicide note was found. Tata – the biggest car manufacturer in India – acquired Jaguar Land Rover for $2.3 billion in 2008, making the Jaguar technically not British but Indian.  Tata did well with Jaguar but the company has been going through a slump due to the lukewarm response to the low-cost Nano.

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