After putting the Philippines in review, Moody’s Investors Service has also placed four banks in the country, the Power Sector Assets and Liabilities Management Corp. (Psalm) and National Power Corp. (Napocor or NPC) under assessment for upgrade.
But Moody’s sees no immediate changes to the rating of Philippine Long Distance Telephone Co. (PLDT).
In a statement, Moody’s said that it has placed the Ba1/Not Prime local and foreign currency deposit ratings of four Philippine banks on review for upgrade, following the review for upgrade on the debt ratings of the government.
The banks are Banco de Oro Unibank (BDO), Bank of the Philippine Islands (BPI), LandBank of the Philippines (LBP) and Metropolitan Bank and Trust Co. (MBT or Metrobank) Moody’s noted that BDO’s foreign currency senior unsecured debt rating of Ba1 and Metrobank’s local currency subordinated debt rating of Ba2 are placed on review for upgrade, while the bank financial strength ratings of the four banks remain unchanged.
“The review for upgrade of BDO’s, BPI’s, LBP’s and MBT’s ratings reflect our assessment that these ratings would likely benefit from an additional notch of systemic support uplift in the event that the parallel review of the Philippine sovereign debt rating concludes with a rating upgrade,” said Simon Chen, a Moody’s assistant vice president and lead analyst for the Philippine banks.
Moody’s added that in considering the government’s capacity to provide support, which is reflected primarily by the government’s own rating, the assessment will also take into account the systemic importance of each bank, which would influence the government’s willingness to extend support in times of stress.
The rating agency will consider factors including the bank’s market share of system deposits and loans, and the bank’s role in the country’s payment system.
“The government’s ownership in banks could also impact Moody’s view of the government’s willingness to provide extraordinary support to the banks,” it stated.
Furthermore, Moody’s said that an upgrade of the sovereign rating of the government would likely lead to an upgrade of the bank ratings placed under review, assuming all other bank fundamental credit characteristics remain robust.
Napocor and Psalm
Moody’s is also considering the upgrade in the debt ratings of the government-owned Napocor and Psalm.
The global debt watcher specified that it has placed the Ba1 Senior Unsecured rating of Napocor on review for upgrade, as well as the Ba1 Corporate Family and Senior Unsecured bond ratings of Psalm.
“The senior unsecured bond rating reflects the Philippine government’s unconditional and irrevocable guarantee for NPC’s rated long-term bonds,” said Mic Kang, Moody’s vice president and senior analyst.
Napocor earlier transferred 99.9 percent of its rated US dollar bonds, including $300-million due in 2028 and $160-million due in 2016 to Psalm.
Kang cited, on the other hand, that Psalm’s ratings “are underpinned by its distinct policy role and its close integration with the government.”
Moody’s also explained that the company’s policy role is to restructure and reform the Philippine power sector. In addition, the government is obligated to assume any remaining assets and liabilities at the end of Psalm’s corporate life.
“The government has provided unconditional and irrevocable guarantees for debt issued by Psalm and transferred from National Power Corp.,” Kang further said.
Psalm is the agency mandated to privatize Napocor’s assets and manage its finances. It is wholly owned and controlled by the Philippine government.
No changes for PLDT yet
As for PLDT, Moody’s said that its decision to review the sovereign ratings of the Philippines for an upgrade will not have any immediate impact on company’s Baa2 rating and stable outlook.
In a statement Yoshio Takahashi, a Moody’s assistant vice president and analyst, said that, “We expect PLDT [earnings before interest, tax, depreciation and amortization, or Ebitda]to maintain its strong earnings. Its adjusted consolidated Ebitda margin is likely to stay at around 50 percent, given its strong market positions in the fixed-line, broadband and cellular services businesses in the Philippines.”
Moody’s said that the possible upgrade of the sovereign rating would allow Moody’s to review PLDT’s rating for upgrade, if its fundamental credit quality is assessed to be at Baa1 or above.
However, Moody’s believes that PLDT’s Baa2 rating appropriately reflects its fundamental credit strength. On the other hand, the rating is constrained by the high dividend payout ratio and the perceived increase in the company’s investment appetite.
Moody’s expects PLDT’s adjusted debt/Ebitda to remain in the 1.5 times to two times range in the next two years, as it is likely to maintain a 100-percent dividend payout ratio, comprising a 70-percent regular dividend and 30-percent special dividend.
Furthermore, PLDT will likely continue to invest in or acquire businesses to maintain revenue and earnings growth. In particular, Moody’s believes that the firm will increase its investments in the media industry to expand data and broadband revenue, although the size of investments are not expected to be so large in the near term.
Moody’s would consider upgrading PLDT if the company maintains adjusted consolidated Ebitda margins of over 45 percent; lowers its adjusted consolidated debt/Ebitda to below 1.5 times on a sustained basis; and ensures that shareholder returns and asset investment policies do not substantially weaken its financial profile.
PLDT is the first Philippine company that was given an investment grade rating by Fitch.
Mayvelin U. Caraballo, Madelaine B. Miraflor and Rosalie C. Periabras