South and Southeast Asian High-Yield Corporates Can Manage Foreign Currency Debt Exposure

Most high-yield rated corporates in South and Southeast Asia can manage the risks associated with their foreign currency debt exposure, says Moody's Investors Service.

"Of the 45 non-financial high-yield corporates we rate in South and Southeast Asia, more than half have at least 75% of their debt denominated in foreign currency," says Annalisa Di Chiara, a Moody's Vice President and Senior Analyst.

"But most of these companies generate revenue streams in the same foreign currency as their debt, which provides a natural hedge or have financial hedges in place to help them manage currency fluctuations," adds Di Chiara.

Di Chiara was speaking on the release of a new special comment, entitled "Most High-Yield Rated Corporates Can Manage Foreign Currency Debt Exposure."

According to the Moody's report, the companies' hedges limit the risk of profitability declining or debt levels and borrowing costs rising if the domestic currency weakens against the foreign currency.

In some cases, strong liquidity, long-dated maturities and low leverage provide additional cushion for companies to absorb domestic currency depreciation without severely weakening their credit quality or ratings.

As a result, for all but four companies, a sustained 20% depreciation in their local currency would not cause a significant contraction in EBITDA nor a meaningful rise in leverage as measured by debt/EBITDA.

Of the approximately $82.5 billion debt outstanding for the 45 companies, $53.0 billion (64%) is denominated in foreign currency. Seven rated Indian corporates account for around $28.8 billion of the foreign currency debt.

Additionally, 23 Indonesian corporates have foreign currency debt outstanding totaling $18.2 billion.

Furthermore, around $43.5 billion (82%) of the $53.0 billion of foreign currency debt outstanding is denominated in US dollars.

"Of the 45 companies, 24 have more than 75% of their outstanding debt in US dollars. However, 17 are naturally hedged as nearly all of their revenues and operating expenses are denominated in US dollars," says Di Chiara.

These companies operate in sectors where products are typically sold in US dollars such as mining, oil, chemicals or technology.

"Of the remaining seven companies, three have financial hedges in place to reduce the negative impact of local currency depreciation against the US dollar," adds Di Chiara.

The three companies are all Indonesian and generate the majority of their revenues and operating costs in rupiah, while 75%-100% of their debt is denominated in US dollars.

This leaves just four companies with currency mismatches, which together accounts to a total of US$2bn in outstanding debt. However, mitigating factors provide these four companies with some cushion in the event of renewed currency depreciation.

Moody's report also notes that most companies have headroom under bank covenants.

Around 15 public companies have a meaningful portion of non-domestic bank loans outstanding, which are governed by maintenance covenant tests.

However, based on Moody's data, most of these companies have headroom under their financial covenants to absorb a sustained 20% depreciation in isolation and in their local currency.


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