Recently because of the poor performance of some locally listed energy issues, we were asked of the opinion of why this has been so and if we agreed with a study of a domestic broker on the notion that the recent share price decline have been prompted by 1) the question of having to raise money in today's environment given the scale of the company's refinancing requirements and 2) the falling value of the equity collateral of its recently acquired subsidiary which mandates the said company to raise funds to cover such deficit.
Some FACTS first:
1. These issues have been on a downtrend since October last year, which basically reflects overall market decline.
2. Since the advent of the credit crisis, foreign selling has dominated the selling side
Our observations:
One, the study has been ambiguous in the order of causality: have the decline of share values in the said issues been "causing" debt refinancing problem, or has debt refinancing woes "caused" the losses in its share prices?
Two, given the "facts" above, we really doubt if the declining trend had been all about debt refinancing. The Phisix bear market has been due to net foreign selling which has been a broadmarket affair since the credit crisis surfaced. And as we have been saying it is the deleveraging dynamic that has been the vicious knot that ties the miseries of global markets. The debt refinancing issue has only been recently raised.
On our end, the thesis of "debt refinancing woes" could be based on sheer speculation than of genuine concerns.
Three, while there has indeed been some spillover of the credit woes to Asia, this hasn't totally sucked liquidity out enough to squeeze the Asian or Emerging Market sovereign or corporate debt markets.
According to Christian Monitor: "Dutch bank ING has calculated that $111 billion worth of emerging market bonds must be refinanced during the next year. But credit is tight. That's raising doubts about whether corporate borrowers will be able to refinance their loans.
"I don't think we'll see a sovereign debt default problem," when a country can't repay its loans, says Mr. Das. The focus will instead be on banks and "companies that have been major issuers into the credit bubble."
"He says, "Russia, Kazakhstan, and Ukraine had a number of banks issuing debt. They haven't all lost access [to credit], but if even Gazprom is having to pay higher [interest rate] spreads [on loans], you can be sure that the weaker names will continue to have a much harder time getting bond deals done.""
Another, it seems the loan market in Asian remains vibrant, click on FinanceAsia article.
Fourth, the underlying business models of these companies generate immense cash flows. Thus, the problem won't necessarily be about the access to debt but instead to the cost of debt. This means the high cost of financing (assuming the tight credit environment) risks taking a bite out of the company's earnings or bottom line.
Having said so this bring us to perspective of the company's solvency; will the "high" cost of debt refinancing render the company insolvent? Unlikely in my view. And since the problem is NOT one of INSOLVENCY, thus, the controversy over the company's refinancing could be seen as "rationalization" (looking for excuses to justify present market action) or Available Bias (the use of current events to explain market actions). We think that the company will easily find a lending window given its generally feasible business model.
Fifth if the company is faced with any risk, it could emanate from the political front (populist policies), as the owners of the said companies have been seen as political foes.
All told we adhere to Edwin Lefevre's advise (truism), "In a bear market all stocks go down and in a bull market they all go up...I speak in a general sense."
