Winners and losers of foreign currency debts

THE depreciation of the ringgit against the greenback has increased the vulnerability of corporations that have high exposure in foreign currency loans, especially US-dollar denominated debts.

However, this does not necessarily mean that these companies are in trouble.

This is especially so if the company is generating revenue in foreign currency, and thus is naturally hedged.

YTL Corp Bhd, MISC Bhd, Malaysia Airports Holdings Bhd, IOI Corp Bhd and Bumi Armada Bhd are likely to suffer the least because their assets and earnings match their foreign currency debts.

YTL has a total debt of RM35.6bil, one of the highest among the listed companies on Bursa Malaysia. While 60% of YTL’s total debt is in foreign currencies, more than 65% of its revenue is from overseas and most of its borrowings are tied to its power plant and water assets.

“YTL will only take foreign currency debts for assets that will generate revenue in that particular currency, it’s a natural hedge, which reduces the company’s risk from the volatility in the currency market,” says an analyst.

Meanwhile, for Maxis Bhd and Axiata Group Bhd, their exposure to US dollar debt is at 32% and 44%, respectively.

About 41% of Axiata’s revenue is from Malaysia, 34% from Indonesia and 10% from Bangladesh, while the bulk of Maxis’s revenue is from Malaysia.

Axiata’s management has recently noted that the company is currently in the midst on managing its US dollar debt exposure and plans to reduce this in the next six months.

The company is planning to restructure a US$590mil loan taken by its Indonesian unit into local currency-denominated partial sukuk.

Companies such as MISC Bhd and Bumi Armada benefit from the sustained weakness of the ringgit against the US dollar because its income and cost are predominantly quoted in US dollar terms.

Based on Bumi Armada’s annual report, the company is exposed to fluctuations in forex rates as it does not hedge its interest rate risk.

An increase rate hike of 0.5% for US dollar will have an impact of RM1.4mil loss and vice versa.

“However, the company’s foreign denominated borrowings are hedged and as such any interest rate fluctuations will have minimal impact,” it stated in the annual report.

Meanwhile, AirAsia Bhd and Astro Malaysia Holdings Bhd seem more vulnerable to a prolonged weakness of the ringgit, as their margins are squeezed by increased operational cost.

For AirAsia, its jet fuel costs and aircraft parts are primarily denominated in US dollar while sales are mainly in ringgit.

About 85% of AirAsia’s debt is in US dollar for the acquisition of its fleet of aircraft.

For the second quarter ended June 30, the company’s unrealised forex loss on borrowings totalling RM43.6mil was due to the adverse movement in the exchange rate on US dollar-denominated borrowings.

Stripping off the forex loss and termination of finance cost, AirAsia’s pre-tax profit for the period is RM48.76mil compared with RM255.31mil in the corresponding period last year, where it had enjoyed a gain of RM202.92mil on forex gains on borrowings.

Nonetheless, AirAsia has active hedging strategies, of which it had hedged 51% of its fuel requirement for eth second half of this year at US$84 per barrel.

For Astro, according to HLIB Research report, about 70% of its content cost is in US dollars and 49% of total borrowing is in denominated in US dollar, while the receipts are in ringgit.

According to Standard & Poor’s Ratings Services, the weakening ringgit would have limited impact on the cash flow adequacy and operating performance of Malaysian companies under its rating, namely, Petroliam Nasional Bhd, Tenaga Nasional Bhd, Sime Darby Bhd, IOI Corp Bhd, Axiata, Telekom Malaysia Bhd and MISC and Genting Bhd.

The rating agency points out that the eight companies had moderate leverage, sound liquidity, and generally conservative financial policies.

It notes that the foreign currency borrowings of the companies has increased moderately over the past three years.

“We estimated that these companies’ total foreign currency debt had reached the equivalent of RM102.3bil for the most recent reporting period available (most of which are as of March 31, 2015). This compares with about RM85bil as of Dec 31, 2011. The numbers appear high. But Petronas accounts for close to half of the total,” it says in a report.

S&P says that the liquidity is adequate or strong for seven out of eight companies’ and the cash in hand for seven companies amply covers the short-term debt maturities.

For Sime Darby, the ratio of cash to short term debt is below one time, says S&P.

“But the figure excludes multi-year revolving credit facilities, and we believe the company, like the other rated companies in Malaysia, has sound access to domestic and international bank and bond markets,” said S&P.