Asean billionaires feel devaluation pain as interest bills rise

[JAKARTA] Two of Southeast Asia's richest businessmen are experiencing the weight of dollar strength after loading their business empires up with cheap US currency debt.

Anthoni Salim, who controls the First Pacific Co conglomerate, and T. Ananda Krishnan, a major shareholder of Malaysian mobile phone operator Maxis Bhd, are feeling the pinch as the rupiah and the ringgit slump to the lowest since the 1998 Asian financial crisis. The duo's companies have among the most foreign-currency debt in their respective countries, with dollar liabilities totaling at least US$3.8 billion for Salim and some US$2.3 billion for Krishnan, data compiled by Bloomberg show.

While the lessons of the 1998 meltdown have prompted both tycoons to take out currency hedges and seek to balance cash flows and liabilities, concern over their foreign debts is weighing on the two groups' shares and bonds. Although Hong Kong-listed First Pacific stock is down 38 per cent this year its bonds are still trading above par. The pain may be about to get worse as traders price in a 62 per cent chance the Federal Reserve will raise interest rates by December, with 32 per cent saying a rise could come as early as this week.

"Without prudent foreign exchange risk management, a company would have increasing interest payments in local currency, a deteriorating credit profile and rising hedging costs," said Mark Yu, a money manager at Atlanta-based Invesco Advisers Inc., without referring to any specific Asean borrower. Pressure won't let up in the near term, considering "the Fed is going to hike rates, global emerging market economic growth is slowing" and a more flexible yuan fixing will increase regional currency volatility, he said.

Since China devalued the yuan in August, Malaysia's ringgit has weakened 7.6 per cent, making it the worst-performing currency in Asia ahead of Indonesia's rupiah, which is down 6.1 per cent. The peso has weakened 4.3 per cent this year, 2 per cent of that since the depreciation.

Hong Kong-headquartered First Pacific, with interests ranging from noodle maker PT Indofood Sukses Makmur to Philippine Long Distance Telephone Co, had US$1.8 billion of dollar-denominated borrowings as of June 30, its interim report shows. First Pacific's main source of income is dividends from subsidiary companies in Indonesia and the Philippines. Mr Salim, 66, is chairman and ultimately controls 45.1 per cent.

First Pacific's operating companies "have been proactively arranging local currency loan funding," Sara Cheung, an investor relations official in Hong Kong at First Pacific, said. Its Philippines phone company, PLDT, had revenues that were either denominated in, or linked to, dollars of more than US$700 million last year. Indofood also derived US$400 million in export sales in 2014, she said.

E-mails and telephone calls to Mr Salim's personal assistant based in Jakarta went unanswered. Salim is Indonesia's fifth- richest person. Eu Jin Song, a Kuala Lumpur-based spokesman for Bumi Armada Bhd, one of T. Ananda Krishnan's companies, said Bumi's dollar debt is used for projects secured against long- term contracts that generate U.S. dollar revenue. Unlike Mr Salim's companies, Mr Krishnan's foreign debts are bank loans.

Companies that have strong export earnings may be less affected, according to Shamaila Khan, an emerging market money manager at AllianceBernstein Holding LP, which oversees about US$485 billion.

"Our view has been for the past three years that we're going to experience a strong dollar, so what I've been picking are exporters, companies that are solid exporters banking on the fact global growth is not going to be fantastic but it's going to be stable," Mr Khan said, declining to talk about the two tycoons specifically.

First Pacific's US$400 million of 2019 bonds have fallen from a high this year of 108.057 cents on the dollar in April to 105.506 cents currently, Bloomberg-compiled prices show. They were sold to investors at par, or 100 cents on the dollar, in June 2012. Philippine Long Distance Telephone's dollar notes due 2017 are trading at 108.402 cents compared with 113.517 cents at the start of the year. PLDT's indirectly owned Cignal TV Inc is starting a television channel in the Philippines under license from Bloomberg LP, the parent of Bloomberg News.

After sliding, First Pacific's shares are trading at an about 38 per cent discount to net asset value. PLDT stock has declined 18 per cent this year while Indofood Sukses Makmur has fallen 21.1 per cent.

"First Pacific is trading at a significant discount to net asset value," Singapore-based Crispin Francis, a special situations analyst at Smartkarma Innovations Pte, said. "That's related to the currency definitely, as they're exposed to emerging markets. I think they'll survive and do well though. It's a huge company with a very diversified business."

Foreign debts of companies directly and indirectly controlled by First Pacific total US$3.83 billion, the company's mid-year results show. Just over 10 percent of that is hedged. The amount includes US$534.5 million of debt at Mr Salim's flagship instant noodle maker Indofood Sukses Makmur, which has debt equivalent to 3.44 times its operational earnings, the second- highest ratio among Indonesia's largest listed companies, Bloomberg data show. Officials at Indofood didn't immediately respond to an e- mailed request for comment.

Companies related to Malaysia's second-wealthiest entrepreneur, 77-year-old T. Ananda Krishnan, owe more than US$2.3 billion in foreign-currency debt. One, pay TV operator Astro Malaysia Holdings Bhd, had some US$296 million of dollar obligations as of April 30, which was hedged. Officials at Astro Malaysia also didn't immediately respond to a request for comment.

Another company, oil services provider Bumi Armada, had US$1.2 billion of foreign-currency obligations as of June 30. Although Bumi Armada earns the bulk of its revenue in US dollars, its clients are cutting costs amid supply challenges in the oil and gas industry, Bumi Armada said in its March 31 quarterly report.

Bumi Armada spokesman Song said the company's "contracts are based on US dollar charter rates and generate US dollar revenue for the group." Another of Krishnan's companies, mobile phone operator Maxis, had US$829 million in foreign debt outstanding as at June 30, its interim report shows. All that amount was hedged using cross currency interest rate swaps. Maxis had debt equivalent to 54.5 per cent of its assets, the fourth-largest ratio in Malaysia, according to data compiled by Bloomberg.

T. Yoges, a Maxis spokeswoman in Kuala Lumpur, didn't reply to two e-mails seeking comment. An official working for Krishnan personally also didn't respond to requests for comment.

According to RAM Rating Services Bhd., most of Maxis's dollar debt is already hedged. "How much more they are affected by a stronger US dollar depends on the level where they hedged, but we think it's minimal," Adeline Poh, an analyst in Kuala Lumpur at the ratings company, said.

RAM rates Maxis's controlling shareholder, BGSM Management, AA3 with a stable outlook, based on the strength of dividend flows from its 65 percent indirect stake the phone company, Ms Poh said. Most of Krishnan's or Salim's individual companies aren't scored by the three major ratings companies. Standard & Poor's has downgraded seven companies in Indonesia this year and one in Malaysia versus zero upgrades, Bloomberg-compiled data show.

Stock in Bumi Armada is down 17 per cent this year while Maxis's shares have slipped 2.2 per cent. That compares with a 6.5 per cent decline in the FTSE Bursa Malaysia KLCI Index.

"Foreign exchange risk management should be an essential part of a company's financial management," Invesco's Yu said.

BLOOMBERG