Financial agencies unfazed by PLDT credit rating downgrade

Standard & Poor’s has downgraded its long-term foreign currency credit rating and senior unsecured debt rating on telecommunications leader Philippine Long Distance Telephone Co. (PLDT) by two notches or from ‘BB+’ to ‘BB-’ but some financial agencies remain unfazed.

The credit rating agency mentioned the Filipino carrier’s deferment of its $250 million planned bond float in September as indicative of the uphill task the company faces in terms of refinancing its debt.

S&P said that the downgrade reflects the company’s difficulties in refining its debt, against the background of a relatively short debt maturity structure and a highly leveraged balance sheet. This is despite the improvement in the company’s underlying business.

This move is by no means a surprise. It is important to note that the equities markets have already priced in a PLDT debt-default scenario, so S&P’s decision somewhat lags the company’s share price developments and should not be particularly significant.

ABN-Amro fixed income analyst Low Teck Hoon concurs with this view, pointing out the PLDT’s debt has been trading "like a Single B credit for a long time already."

Furthermore, following the Sept. 11 terrorist attacks it has traded substantially wider than a US B Industrial. She sees the downgrade as the credit rating agency "essentially giving itself leeway to change the rating again at anytime."

However, sentiment is likely to worsen on the back of this news and the stock may see some short term pressure. With regard to future refinancing, PLDT has already outlined its options and should stay on its proposed course, although the cost of future refinancing may be slightly higher.

"We reiterate our ‘Buy’ recommendation and emphasize our belief that a combination of internal cash flow and debt reorganization will enable PLDT to cover its maturing debt," ABN-Amro said.

It added: "We do not believe this announcement will materially impact sentiment as the share price performance over the past few months has already reflected PLDT’s financial problems."

Around $1.3 billion of PLDT’s loans is maturing in 2003/2004. PLDT plans to refinance about half of the commitment with internally generated funds, while the remaining loans will be repaid with the sale of 15 to 20 percent stake in its wireless subsidiary Smart Communications where an estimated $350 million is expected to be raised.

PLDT officials expect new borrowings from traditional lenders to generate another $350 million for the company.

Recent reports also suggest that PLDT may revive the previously suspended $250-million bond issue next year and is presently trying to secure World Bank or IFC guarantees for the bond.

PLDT stocks are trading at a 34 percent discount to the SOTP valuation of P589.2 and has sufficiently discounted the balance sheet and sovereign risks.

However, sentiment will remain weak until the conclusion of the debt restructuring next year. "We believe the key catalyst to a re-rating is the finalization of the Smart sale by the end of the first quarter of 2002," ABN-Amro noted.