‘PLDT’s budget woes may weigh on credit profile’

MANILA, Philippines — The sizable capital expenditure budget overrun by telco giant PLDT Inc. could stretch its balance sheet and weigh on its credit profile, according to S&P Global Ratings.

The debt watcher said governance risks arising from the overrun could add to the stress.

S&P said PLDT could only tolerate a small amount of additional cash outflow from the budget overrun before it erodes all leverage headroom at the current rating of BBB+ and stable outlook.

“That’s because the Philippines-based telecom company’s balance sheet has already been worn thin from capital expenditures and working capital cash drain in the past two years,” it said.

According to S&P, PLDT could withstand no more than an incremental P10 billion excess spending over the base case cash capital expenditure of P75 billion to P80 billion in 2023.

It warned that anything above P10 billion would result to a deterioration in PLDT’s debt-to-EBITDA (earnings before interest, taxes, depreciation, and amortization) ratio to beyond the downgrade trigger of 2.5 times.

“The implications and cause of the overrun remain under investigation by PLDT. Based on the company’s worst-case scenario, we estimate the debt-to-EBITDA ratio could reach 2.8 to 2.9 times in 2023. That is if the full P48 billion overrun from 2019-2022 represents an extra cash outflow, resulting in incremental debt to fund it,” S&P said.

Furthermore, the credit rating agency said the overrun also suggests management and governance shortcomings.

“The ability of PLDT’s management to arrest higher-than-budgeted capital expenditures on a timely basis, and the ability of the company’s board to provide sufficient oversight have come into question. This is given that the overrun stems from capital expenditures dating as far back as 2019,” it said.

Investigation so far by PLDT has not uncovered any fraudulent transactions or procurement anomalies.

“All that said, PLDT has some levers that could mitigate the hit to its credit standing, in our view. The company is contemplating another tower sale in 2023, for a portfolio of up to 1,350 towers. This would be on top of the recently announced sale of 650 towers,” S&P said.

S&P said that this year’s sale and leaseback of close to 6,000 towers brought in about P77 billion in proceeds and rendered some financial flexibility to the company.

Furthermore, PLDT is also undergoing a management reorganization to address weaknesses that had allowed such budget overruns to occur.

“We expect more clarity on the overrun by early 2023. PLDT expects to complete internal investigations by the end of 2022,” the debt watcher said.

Despite uncovering the overrun, PLDT assured its shareholders that it remains healthy as a business even after it uncovered a capital expenditure overrun of P48 billion in the past four years.

“As stated in its disclosure, PLDT has not unearthed fraudulent activities in relation to the capex overrun. It would make the necessary disclosures if this changes in the future. Furthermore, the business and the outlook for the business continue to remain healthy,” PLDT said.

The Pangilinan-led telco vowed to cooperate with the Securities and Exchange Commission, the Philippine Stock Exchange and the Capital Markets Integrity Corp. (CMIC) in the inquiry launched against PLDT.

The SEC, in particular, wants to look into the selloff of PLDT shares prior to its disclosure before the PSE.