Escalating Systemic Risk: As Cash Reserves Plummeted, San Miguel’s 9M Debt Zoomed to an Astonishing Php 1.405 TRILLION!

 

In economics, things take longer to happen than you think they will, and then they happen faster than you thought they could― Rudiger Dornbusch 

In this issue 

 

Escalating Systemic Risk: As Cash Reserves Plummeted, San Miguel’s 9M Debt Zoomed to an Astonishing Php 1.405 TRILLION! 

I. The Public’s Blind Spot: San Miguel’s 9M Debt Zoomed to an Astonishing Php 1.405 TRILLION!  

II. San Miguel’s Worsening Liquidity Crunch! 

III. SMC’s Debt-in, Debt-out Dynamics: Mounting Signs of Hyman Minsky’s Ponzi Finance Dynamic in Motion 

IV. SMC’s Escalating Fragility: Intensifying Concentration and Counterparty Risks 

 

Escalating Systemic Risk: As Cash Reserves Plummeted, San Miguel’s 9M Debt Zoomed to an Astonishing Php 1.405 TRILLION! 

 

The public seems unaware that the published debt of one of the Philippines' largest listed firms, San Miguel, has skyrocketed into the stratosphere! Why this represents a systemic risk.

 

I. The Public’s Blind Spot: San Miguel’s 9M Debt Zoomed to an Astonishing Php 1.405 TRILLION!

Figure 1 

It was a surprise that this tweet on San Miguel's [PSE: SMC] debt had an explosive reach, interactions, and responses, given my tiny X (formerly Twitter) account (few followers).  

 

Except for comparing its nominal growth with SMC's free float market capitalization and my conclusion, "This won't end well," the tweet was mainly about facts and barely an analysis.   The Fintweet world seems astounded by the "new" information.   If my conjectures are accurate, this only exposed the public's blind spots on the escalating systemic fragilities.    

 

Why has the public been sucker punched?

 

SMC has openly published their debt conditions not only in their 17Q and 17As but, more importantly, in their "analyst briefing presentations."  

Yet, there have been barely any mentions of these in social media or discussions of the consensus experts.   Mainstream news has signified an echo chamber of corporate press releases fixating on the top and bottom lines (in percentages).   

 

Other than these, a deafening silence. Possible reasons: Selective attention? The Principal-Agent Problem? Shaping the Overton Window? 

 

II. San Miguel’s Worsening Liquidity Crunch! 

 

San Miguel reported a Php 31.187 billion net income in the three quarters of 2023.  That's 141% or Php 18.242 billion improvement from a year ago.   

 

Compared to the PSEi 30 peers, SMC generated the most income in % and pesos in Q3 2023, resulting in the second-best income growth in the last three quarters after JGS.  

Figure 2 

Interestingly, despite the so-called profit boom, SMC borrowed a whopping Php 68.2 billion in Q3 to send its debt level to a mind-boggling Php 1.405 TRILLION!  T-R-I-L-L-I-O-N!  (Figure 1, upper window) Of course, this hasn't been a strange dynamic to us. 

 

SMC has increased the pace of its quarterly borrowing growth in pesos.  It has borrowed over Php 50 billion in the last 5 of the six quarters!  

 

And yes, the 9M aggregate debt growth of Php 153.02 billion represents around 62% of SMC's free market float as of November 17th. 

 

Strikingly, Q3 borrowing exceeded the firm's 9M GROSS profits of Php 62.875 billion!  

 

And despite the profits and the borrowing, SMC's cash reserves plummeted by 18.7% or by Php 60.984 billion! 

 

As a result, current liabilities of Php 450 billion soared past cash reserves of Php 265 billion, which extrapolates to the widest deficit (Php 184.9 billion) ever!  (Figure 1, lower graph)

 

In short, like Metro Pacific, underneath the consensus talking points, SMC has been plagued by a developing liquidity crunch.   

 

III. SMC’s Debt-in, Debt-out Dynamics: Mounting Signs of Hyman Minsky’s Ponzi Finance Dynamic in Motion 

Figure 3 

 

SMC's interest expenses have recently soared, even as it dipped in Q3. 

 

Its quarterly share of gross margins has been on an uptrend since 2016. (Figure 3, topmost pane)

  

To be sure, BSP's recent rate hikes have worsened SMC's onus exhibited by the rising interest expense.  

 

But it isn't interest rates alone.  Rising debt levels are the biggest contributor to SMC's mounting debt burden. (Figure 3, middle and lower charts)

Figure 4 

 

SMC's FX exposure represents about half of its debt liabilities. (Figure 4, upper chart)

 

From SMC's Q3 17Q: "The increase in interest expense and other financing charges was mainly due to higher average loan balance of SMC and Petron coupled with higher interest rates."  

 

Though the net income (before interest and tax) bounce has lifted SMC's Interest Coverage Ratio (ICR) above the 1.5% threshold, the above numbers show why "EBIT" could be erroneous, and thus, the dubiety of the higher ICR. (Figure 4, lower graph)

 

Remember, Php 450 billion of 9M SMC's debt is due for payment within a year (current), while "net cash flows provided by operating activities accounted" for Php 142.450 billion during this "profit boom."  Aside from the current borrowing to bridge the current gap, if cash flows sink further, wouldn't this require even more borrowing? 

 

To be more precise, to survive, SMC requires continuous borrowings to fund this ever-widening gap, or it may eventually be required to sell its assets soon!  

 

And this dynamic, as we have repeatedly been pointing out, represents Hyman Minsky's "Ponzi finance." 

 

For Ponzi units, the cash flows from operations are not sufficient to fulfill either the repayment of principle or the interest due on outstanding debts by their cash flows from operations. Such units can sell assets or borrow. Borrowing to pay interest or selling assets to pay interest (and even dividends) on common stock lowers the equity of a unit, even as it increases liabilities and the prior commitment of future incomes. A unit that Ponzi finances lowers the margin of safety that it offers the holders of its debts. (Minsky, 1992) 

 

That is to say, the prospect of the BSP's lowering of interest rates will do little to ease or mitigate SMC's intensifying cash-flow stream predicament.  

 

IV. SMC’s Escalating Fragility: Intensifying Concentration and Counterparty Risks

 

And that's not all. 

 

It's also about escalating CONCENTRATION and CONTAGION risks. 

 

SMC accounted for 24% and 25% of the PSEi 30's 9M and Q3 gross revenues, 19.3% of 9M cash reserve, and 26.8% gross debt.   

 

SMC's 9M net debt growth of Php 153.019 billion signified the dominant majority or 71.82% of the PSEi 30's Php 213.07 trillion net debt growth!  Amazing.  

 

Figure 5

Here’s the kicker: SMC's Php 1.405 TRILLION debt represents a stunning 4.71% share of the BSP's Total Financial Resources at Php 29.855 trillion—which is at an ALL-TIME HIGH! (Figure 5)

 

Expressly, aside from the government, the financial system has vastly increased its exposure to SMC, which comes at the expense of more productive firms and which translates to savings/capital consumption. 

 

And the financial system's record exposure to SMC also raises systemic fragility.  That is to say, it is not only a problem of SMC but also a COUNTERPARTY risk.   

 

So, in addition to the expanded risks to SMC’s equity and bondholders, as Hyman Minsky theorized, other creditors, suppliers, employees, and the daisy chain or lattice network of firms doing business with SMC (directly and indirectly) may suffer from a creditor's "sudden stop."  

 

That being said, the buildup of SMC’s risks represents a non-linear, non-proportional, and asymmetrical feedback loop.  

 

Aside from political entrepreneurship, the BSP's easy money regime has fostered and nurtured SMC's privileged financial status, which increasingly depended on the expansion and recycling of credit.  As such, SMC has transformed into a "too big to fail" firm.   

 

When crunch time arrives, will the BSP (and) or Bureau of Treasury bailout SMC?  Or, will these agencies finance a bailout of it by a consortium of firms? 

 

How will these impact the economy and the capital markets? 

Stay tuned. 

 

____ 

References 

 

San Miguel Corporation, SEC Form 17Q, Management Discussion and Analysis; Edge.PSE.com.ph, P.8, Table p.18; November 15, 2023 

 

Hyman P. Minsky The Financial Instability Hypothesis The Jerome Levy Economics Institute of Bard College May 1992 

 

PSEi 30 2Q and 1H Performance Echoed the "Shocking" 4.3% GDP Dive; San Miguel’s Interest Expense Skyrockets!

 

It is dangerous to be right in matters on which the established authorities are wrong. – Voltaire 

 

In this Issue 

PSEi 30 2Q and 1H Performance Echoed the "Shocking" 4.3% GDP Dive; San Miguel’s Interest Expense Skyrockets! 

I. The BSP’s (3Rs) Repricing, Refinancing, and Repayment Risks (3Rs) Redux 

II. San Miguel a Case of Minsky’s Financial Instability Theory? SMC’s Debt Hits Php 1.338 TRILLION as Interest Expense Skyrocket!  

III. Shades of the "Shocking" GDP: PSEi 30 Revenues and Income Growth Rate Dived in Q2 2023  

IV. Debt Isn't a Blunt Statistic; It Is the Lifeblood of the Modern Fiat Money Based Economy 

V. PSEi 30: 2Q and 1H Performance by Sectors 

VI. PSEi 30 2Q and 1H Performance by Members 

 

PSEi 30 2Q and 1H Performance Echoed the "Shocking" 4.3% GDP Dive; San Miguel’s Interest Expense Skyrockets! 

The Philippine PSEi 30 performance resonated with the "shocking" dive in the (4.3%) Q2 & (5.3%) H1 GDP.  San Miguel's debt hit Php 1.338 TRILLION while interest expenses zoomed! 

I. The BSP’s (3Rs) Repricing, Refinancing, and Repayment Risks (3Rs) Redux 

 

The higher debt levels must now be managed against rising interest rates and peso depreciation. Several studies suggest that higher levels of debt relative to economic output generally leave the financial system to be more vulnerable. In particular, debt servicing capacity of highly leveraged borrowers becomes progressively more sensitive to drops in income and sales as well as increases in interest rates. For a given shock, higher debt could result in a higher probability of default. As deleveraging starts to unfold, consumption and investment fall, ultimately affecting economic growth (FSCC, 2018) 

 

An exposition of the present?  Nope.  

 

This quote was from the venerable late BSP Governor Nestor Espenilla Jr.'s 2017 Financial Stability Report (FSR). It was a discourse on the economic conditions of 2017. 

 

But there's a difference: A critical one. 

 

The economy’s debt levels, CPI rates, interest rates, and the USDPHP have been substantially higher today than in 2017, which, if still alive, should amplify the late Governor's concern. 

 

Another excerpt from the same FSR: 

 

As a matter of fact, firms listed in the PSE exhibited a rising debt-to-equity ratio, from about 45 percent in 2008 to more than 86 percent as of end-March 2018 (FSCC, 2018) 

 

Once more, the balance sheets of the elite members of the PSEi 30, comprising the principal benchmark of the Philippine Stock Exchange (PSE), have been more levered compared to 2017. 

 

If inflation, rising rates, and elevated debt levels prompted the late Governor Espenilla to warn... 

 

While there is no definitive evidence of a looming crisis, it is also clear that shocks that have caused dislocations of crisis proportions have come as a surprise. What is not debatable is that repricing, refinancing and repayment risks (3Rs) are escalated versus last year and this could result in systemic risk if not properly addressed in a timely manner. (FSCC, 2018) 

 

...why has everyone been ignoring or neglecting conditions that are far worse today than in 2017? 

 

This outlook will deal with their 2Q/1H 17Q reports from five perspectives: San Miguel’s transitions, an overview of the PSEi 30, an explanation of debt, the PSEi performance by industry, and individual outcomes. 

 

II. San Miguel a Case of Minsky’s Financial Instability Theory? SMC’s Debt Hits Php 1.338 TRILLION as Interest Expense Skyrocket!  

Figure 1 

 

We begin this treatise with an inquiry on the most leveraged company, San Miguel Corporation [PSE: SMC], which debt reached the second highest level in Q2 at an eye-popping Php 1.338 TRILLION!  To emphasize: TRILLION! (Figure 1, upper chart)

 

As of August 18th, SMC's market cap was at Php 249.75 billion.  In Q2, SMC's debt grew by an astounding Php 214.4 billion or 19.1% YoY and Php 59.1 billion or 4.6% QoQ.  So the amount of debt added to its portfolio signified about 85% of its market cap!   

 

From a systemic level, SMC's Q2 debt represented about 4.7% and 5.7% of the TOTAL and BANK Financial Resources of Php 28.53 trillion and Php 23.5 trillion (as of May 2023)!   

 

SMC's extensive and mounting (declared) debt exposure showcases the escalating concentration risks of the financial system.  And despite being a privileged borrower, its interest expense exploded in the last three quarters, representing the increased debt stock and rising rates here and abroad.  

 

Interest expense vaulted by 49.17% YoY Q4 2022, 76.33% Q1 and 73.7% Q2 2023 as the BSP and the US Fed raised rates.  A substantial portion of SMC’s debts are foreign-denominated (upwards 35%). (Figure 1, lower graph) 

 

In the meantime, SMC suffered a 14.2% drop in Q2 revenues and a 4.71 % decrease in income to Php 5.59 billion, which weighed on 1H revenues (-3.7%) but still posted a 17.8% increase in published income to Php 23.325 billion. (see figure/table 6 below) 

 

Or, in 1H 2023, SMC borrowed 214.4 billion to produce a paltry income of Php 23.325 billion! 

 

That is to say, to repay its existing liabilities, given the volatility of and the increasing risks of diminishing cash streams, SMC requires even more extensive borrowings (and) or the liquidation of its assets, which in the words of economist Hyman Minsky in describing Ponzi units, "lowers the margin of safety that it offers the holders of its debts." (Minsky, 1992) 

 

Briefly, SMC entirely depends on a persistent reign of easy money to sustain its operations based on political entrepreneurship.  

 

But this borrow-to-churn profits business model is not just about SMC; it epitomizes the business models of present-day enterprises as signified by the elite members of the PSE. 

III. Shades of the "Shocking" GDP: PSEi 30 Revenues and Income Growth Rate Dived in Q2 2023  

Figure 2 

 

Remember the "shocking" 4.3% Q2 2023 headline GDP?    

  

It reverberated with the PSEi 30. 

 

Q2 2023 revenue growth rate of the PSEi 30 firms plunged from 37.7% in 2022 to 8.24% in 2023.  (Figure 2, topmost chart) 

 

The published net income growth rate in Q2 also more than halved, from 52.13% in 2022 to 20.4%. (Figure 2, middle window) 

 

In turn, revenue and income growth rates dropped from 30.56% and 33.06% in 1H 2022 to 12.63% and 20.6% this year.  

 

That’s not all.  

 

In pesos, 1H 2023 marginal revenues increased by Php 372.364 billion, while marginal net income grew by Php 84.659 billion; these were substantially lower than their counterparts of Php 678.08 billion and Php 95.29 billion in 2022. (Figure 2, lowest graph) 

 

The thing is, though aggregate net income rose to a record, marginal net income has slowed. 

Figure 3 

 

How about the published debt? 

 

First, the good news? The growth rate of non-financial corporate PSEi 30 debt slowed too.   It clocked at 12.9% in 2022 but posted only a 7.4% rate this year.    

 

But percentages signify a facade.  That's because, unlike revenues and income, debt is cumulative and compared with a high base.  

 

Unmistakably, debt outgrew income. 

 

In pesos, the published marginal debt increase was Php 389.5 billion, even as net income expanded by Php 84.659 billion. (Figure 3, upper graph)   

 

Or, the PSEi 30 borrowed 4.6 pesos for every peso income it generated!   

 

Borrowings here exclude PSEi 30 banks. 

 

The media and companies love to holler about % growth, but like the GDP, it's a different scenario seen from marginal peso changes. 

 

So, when the late Governor Espenilla Jr. was anxious about rising rates in the face of expansive debt, six years after, the degree of systemic leverage turned for the worst. 

 

IV. Debt Isn't a Blunt Statistic; It Is the Lifeblood of the Modern Fiat Money Based Economy 

 

Debt is not just an inert statistic.  It is the lifeblood of the modern fiat money standard economy that provides financing to the intricate lattice network of demand and supply chains.   

 

First, credit links the downstream to the midstream to the upstream of any industry.   

 

For instance, consumers use credit cards of listed banks to acquire goods or services from retail chains.  Many of these retail chains obtain inputs through credit and so forth.  

 

Second, it also links public and private sector activities.   

 

Another example.  A public infrastructure project, integral to the deficit financing partly funded by debt, undertaken by a political agency subcontracts labor (e.g., project management) and (or) acquires inputs from the private sector (e.g., cement).  Debt-financed public spending activities percolate into the revenues & P/Ls of participating private firms and their ancillary networks. 

 

Third, it also links activities of the horizontal or lateral business stages.  

 

As an illustration: A listed company pursues "horizontal integration" through mergers and acquisitions (M&A) financed by debt.  Think of listed elite food companies acquiring smaller competitors.  

 

Unmistakably, debt has morphed from financing into a crucial driver of revenues and profits or economic activities.  

 

In turn, it relies on the perpetuation of a low-interest rates regime. 

 

On the other hand, an economy dependent on debt is not only afflicted by diminishing returns but a massive build-up of mismatches in the financial system expressed in the economy as increased malinvestments and heightened credit risks. 

And this framework shows the interrelation of public and private debt, which is why debt-to-GDP is an entirely defective metric.

More pointedly, the idea that the firms or the economy could outgrow debt misleads because the latter drives the former (backward causation). 

Nevertheless, the sharp slowdown of the lending portfolio of the banking system last June, coincident with the headline GDP and the growth rates of PSEi revenues and profit and debt, which are all interconnected, should not be a surprise.   

 

The banking system's Total Loan Portfolio (TLP), ex-Interbank and repo lending to the BSP and other banks, slipped from 10.4% to 6.9% last June. (Figure 3, lowest chart)  

 

Again, it remains a mystery that the BSP has yet to release its depository survey, which exhibits the distribution of bank loans and therefore limits our discussion. 

 

V. PSEi 30: 2Q and 1H Performance by Sectors 

 

Figure/Table 4

Nonetheless, banks led the field in the 2Q and 1H with 55.85% and 54.01% in revenue gains and 26.3% and 32.54% in net income expansion on aggressive lending.  

 

Banks also scored the largest peso gains in the 2Q with Php 54.2 billion and ranked second to the Holding Firm sector in 1H with Php 101,762 billion.  

 

The property sector took the second spot.  Revenues soared 30% and 26.3% in 2Q and 1H, while net income jumped by 39.7% and 34.3%, respectively.  

 

In the context of debt, the industrials posted the second-largest increase at 11.09%, with a marginal gain of 49.584 billion. The holding firm sector accounted for 80% of this gain. 

 

VI. PSEi 30 2Q and 1H Performance by Members 

Figure/Table 5 

In Q2, SMPH, GTCAP, and ACEN were leaders in the revenue growth segment with 39.06%, 36.4%, and 32.3%.   In the marginal change in pesos, GTCAP and SM were in the driver's seat with Php 20.9 billion and Php 19.4 billion. 

 

Meanwhile, JGS and GTCAP posted the most net income increases, with triple-digit growths of 273.7% and 154%.  JGS and SM posted the largest peso growth increases of Php 6.9 billion and Php 6.37 billion.  

Figure/Table 6 

In 1H, GTCAP and SMPH took the helm in the revenue growth segment with 31.4% and 29.2%.   

 

In peso marginal changes, SM and GTCAP had the highest growth of Php 43.8 billion and 34.4 billion.  

 

JGS was the runaway leader with a 9,490% increase in net income growth, which also translated to a net marginal increase of Php 17.9 billion.  

 

Aside from SMC, the next three largest borrowers were AC (Php 53.8 billion), MPI (Php 39.5 billion), and AEV (Php 38.8 billion), which aggregate share accounted for a whopping 89% of the total!  

 

Overall, debt reduction involved 9 of the 26 non-financial firms.  

 

And these represent published debt. Some firms may have bundled debt to other segments, like lease liabilities.  

 

In the end, the basic operating model espoused by these companies has expanded from "borrow-and-spend," to repricing, refinancing, and repayments (3Rs). 

 

This won’t end well.  

____ 

References 

 

Financial Stability Coordination Council (FSCC) 2017 FINANCIAL STABILITY REPORT June 2018, Bangko Sentral ng Pilipinas p 24 

 

Ibid, p.22 

 

Ibid, p. 27 

 

Hyman P. Minsky, The Financial Instability Hypothesis, The Jerome Levy Economics Institute of Bard College May 1922, p.7