Market experts raise concern over Udenna’s huge debt

MANILA, Philippines — Stock market observers are getting restless over Davao-based businessman Dennis Uy’s huge debt, saying that a default could send the local stock market in a tailspin.

Uy, however, said there’s no cause for concern.

“Our finances are robust and healthy. We have the support of our creditors, partners and stakeholders,” Uy told The STAR last week.

Market sources’ concerns on Uy’s acquisition binge were somewhat similar to the expansion of San Miguel Corp. (SMC) more than 10 years ago when the company went on a major diversification mode from just being a beer producer to become a mammoth conglomerate in the country with infrastructure, oil and energy in its portfolio.

However, the market was proven wrong because SMC was able to manage its expansion.

Sources said SMC was lucky because the interest rates were benign at the time, with the 10-year bonds at around four percent or lower.

“Today, the 10-year bonds is at 6.5 percent. We have a current account deficit and liquidity is tight. The market could fall back to below 7,000 quickly if a conglomerate like Udenna defaults,” said a market observer. 

Sources said the sheer number of banks, their parent conglomerates and subsidiaries that would be affected if Udenna defaults would be a huge negative trigger for the stock market. 

Uy’s creditors include BDO and Philippine National Bank, which are both publicly-listed, and Bank of China.

A source said that at an interest rate of six percent, Uy’s Udenna Group needs to cough up roughly P400 million in monthly interest payments based on its end-2017 debt level. 

“That requires a lot of cash,” said another source.

But officials have said the company is strong enough to meet its financial obligations. 

Udenna vice president for finance Ignacia Braga said in January that the company’s financial model, which is debt and leveraged buyout, is sustainable. 

A leveraged buyout is the acquisition of another company using a significant amount of borrowed money to meet the cost of acquisition. Under this transaction, the assets of the company being acquired are often used as collateral for the loans.