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 6,600: The Unseen Forces Behind the Mammoth Rebound

 Prepare for the unknown by studying how others in the past have coped with the unforeseeable and the unpredictable—General George S. Patton 

 

In this issue 

 

PSEi 6,600: The Unseen Forces Behind the Mammoth Rebound 

I. Hyman Minsky’s Financial Instability Hypothesis (FIH) in Action! 

II. PSEi 30 6,600: Foreign Money as Drivers 

III. Margin Trades by the Domestic Financial Sector? PSE Low Volume Reflects Dwindling Bank Liquidity  

IV. Big Returns, Poor Market Breadth and More Signs of Illiquidity 

V. Concentrated Gains and Activities Distorts the Marketplace; An Overbought PSEi 30  

A Pivot by the Fed and BSP? Financial Easing Equals the Revival of (FOMO and TINA) Asset Bubbles?  

 

PSEi 6,600: The Unseen Forces Behind the Mammoth Rebound 

 

The benchmark PSEi 30 has returned 15% in eight weeks. Many have come to believe that this marks a critical turnaround.  

 

In contrast, we show that this rebound comes with an inferior structure and a flawed premise. 

 

I. Hyman Minsky’s Financial Instability Hypothesis (FIH) in Action! 

 

Philstar.com November 25: Ayala Land Inc. announced a new borrowing program meant to pay old debts and partially fund corporate expenses amid the pandemic. At its meeting on Friday, the company’s board of directors approved a plan to borrow up to P45 billion from investors via retail bonds and/or corporate notes, regulatory filing showed. The property giant also has an option to raise the cash through bilateral term loans. Proceeds from the upcoming fundraising activity will be used to partially finance “general corporate requirements” and settle debts that are falling due soon, Ayala Land said. (bold mine) 

 

This article, "Ayala Land unveils new bond program to pay old debts," validates our observation that the debt represents the only "real" growth area and that in 2022 component members of PSEi 30 have resorted to panic borrowing. 

  

Worryingly, firms have become more articulate about expanding credit to pay down existing debt.  

  

The late economist Hyman Minski theorized an economic credit cycle transitioning from stability to instability through three phases: Hedge, Speculative, and Ponzi financing. 

  

In a nutshell, hedge finance is where firms can meet their contractual obligations from their cash flows.   

  

Speculative finance is where cash flows can cover only interest payments, not the principal. Therefore, firms increase their reliance on the "rollover" of liabilities.   

  

Finally, the final phase is Ponzi finance. At this stage, cash flows are insufficient to pay the principal and interest liabilities. So, firms resort to either borrowing or selling assets for settlement or refinancing debt. Since the system's dependency on sustained higher asset values becomes entrenched, it becomes prone to crashes and defaults.   

 

Mr. Minsky wrote, "the greater the weight of speculative and Ponzi finance, the greater the likelihood that the economy is a deviation amplifying system." (Minsky, 1992) 

 

In a word, instability! 

 

To recall, the non-financial PSEi members raised an unprecedented Php 732 billion in the nine months of 2022. 

 

With PSEi 30 companies increasingly dependent on the capital markets (debt and equity), this requires substantial increases in prices of the asset markets to convey "confidence" or elevate the "animal spirits." 

 

Aside from the above, the recent selloffs in Philippine assets caused the postponement of a Php 28 billion IPO of an infrastructure holding firm and energy firm owned by a tycoon, as well as a sharp (25%) discount on the Energy REIT offering by another taipan. 

 

It stands to reason that the backbone of the mammoth 7-week rally of the PSEi 30 has been symptomatic of Minsky's Financial Instability Hypothesis (FIH).   

  

Are asset bubbles needed to "save" the system?  

 

II. PSEi 30 6,600: Foreign Money as Drivers 

 

Two weeks ago, we wrote about the health conditions of the PSEi 30 rally. 

 

But again, its ascent has been marred by thin volume, mixed breadth, concentrated gains, and poor market internals… 

 

The lesson is that the opportunity cost of the goal of deliberately pushing up the index through concentrated pumps is the lack of participation in the broader markets. 

 

Despite the index breaching the 6,600 level, there has been little change in the said factors from then, except for foreign money flows. 

 

This week's stunning advance of 2.63% pushed the PSEi 30 returns to 15%. It also marks the seventh week of gains in eight from the lows of end-September. 

 

Figure 1 

 

First, foreign money represents the most evident driver of this countercyclical rally. This is what is seen. (Figure 1, top window) 

 

Foreign money flows reached Php 6.29 billion in the last eight weeks.  But this week's inflows of Php 2.38 billion have signified the largest since February 2022.  

 

Foreign money flows accounted for 45.8% of the total volume.  Though its share has risen from the depths of 2021, it remains below the pre-pandemic levels. 

 

And increasing foreign participation has emerged on the erosion of main board volume.  (Figure 1, middle pane) 

 

That is to say, foreign money flows appear to be filling the void from the corrosion of domestic savings. This is the "unseen."  

 

Nonetheless, in today's globalized world, the definition of foreign money is ambiguous. Money flows from local companies registered abroad and-or joint ventures could be considered "foreign."  

 

Thus, such numbers may not provide an accurate picture of the participants. 

 

III. Margin Trades by the Domestic Financial Sector? PSE Low Volume Reflects Dwindling Bank Liquidity  

 

 Figure 2 

 

From the local side, with retail players sidelined, financial institutions could have material exposure in bolstering the index. 

 

Bank lending to the financial sector has recently picked up steam.   It grew by 9.9% in September.   And the PSEi 30's enormous return of 7.2% last October might have been significantly influenced by it. 

 

The correlation between financial intra-industry lending growth rates and the PSEi probably indicates the flow of margin trades supporting the equity benchmark.  (Figure 2, upper window) [The scheduled publication of the October update on bank loans by the BSP is next week.] 

 

Besides, as noted above, despite the 15% rally, the main board and gross volume remain depressed.   And the low turnover at the PSE can be traced to the diminishing bank liquidity in the banking system. (Figure 2, upper window) 

 

The low turnover also signifies the lack of participation from the retail sector. 

 

Since the 2H of 2021, the main board volume share of the biggest market capitalization (SM, SMPH, BDO, AC, ALI, and JGS) has been on an uptrend. (Figure 2, lower pane) 

 

As previously noted, the thrust to buoy the index through concentrated pumps has resulted in lower participation in the broader market.  

  

This data provides further circumstantial evidence of institutional rather than a wider dispersion of trading activities.  

 

IV. Big Returns, Poor Market Breadth and More Signs of Illiquidity 

 

Figure 3 

 

Market breadth also points to the cosmetic features of this rally.   

 

Believe it or not, a marginal decline in breadth accompanied this week's incredible rebound of 2.63%! While the tilt of the aggregate spread was slightly towards the decliners, the latter led in three of the five sessions last week.  (Figure 3, upmost pane) 

 

Moreover, in the last eight weeks, where the PSEi 30 returned 15%, advancing issues only led declining issues by 10! 

 

That's not all.   There has hardly been a significant bounce on the average daily traded issues, which recently plumbed the lows of 2016.  (Figure 3, middle window) 

 

So, the consequence of stuffing the index has been to expand the constellation of illiquid issues! 

 

The animated index also failed to ramp up the average daily trades, which resonates with the volume. (Figure 3, lower pane) 

 

V. Concentrated Gains and Activities Distorts the Marketplace; An Overbought PSEi 30  

Figure 4 

 

Inflating the index requires only big moves on a few market cap heavyweights.  

 

For instance, SM powered mostly last week's 2.63% jump.  The gains of SMPH, Metrobank, BPI, PLDT, and Ayala Corp provided flanking support. 

 

Over the past eight weeks, SM, SMPH, ALI, and BDO registered the highest increases in market cap weights.  (Figure 4, topmost window) 

 

As of last week, the top 5 issues controlled a commanding 45.25% share of the PSEi 30. (Figure 4, middle pane) 

 

And for this reason, index managers resort to frequent mark-the-close pumps, which contributed substantially to the eight-week rebound. About 39% of this week's 2.63% resulted from this. 

 

Unknown to most, price distortions send false signals to the marketplace and the economy, magnifying the entrenched maladjustments.  

 

In the meantime, the RSI and MACD signal that the PSEi 30 reached overbought conditions. In addition, the primary bellwether has touched the 200-day moving average. (Figure 4, lowest pane) 

 

VI. A Pivot by the Fed and BSP? Financial Easing Equals the Revival of (FOMO and TINA) Asset Bubbles?  

 

Finally, the fundamental premise of this rally is that inflation has "peaked" here and in the US.   

 

And so, the Fed may slow hikes or even "pivot" soon.   

 

We offer another perspective.   

Figure 5 

In the risk ON phase, the USD, USD-Php, 10-year UST, and Philippine counterparts have been starkly overbought.  (Figure 5, topmost and middle pane)  

But these benchmarks have also endured retracements.  And being close to oversold, a rebound may occur soon. 

 

Naturally, because market trends operate non-linearly, such represents countercyclical moves. 

 

And in contrast to the consensus, Philippine 10-year yields have outperformed their UST counterpart, meaning institutional traders have priced in inflation than yield arbitrage (rationalized by the BSP for their actions). (Figure 5, lowest pane) 

 

Further, demand is likely to amplify from a sustained increase in financial assets, so this should put a floor on inflation.  

 

And unless something in the world marketplace breaks or economies crash into a recession, most central banks are unlikely to slash rates immediately. 

 

The latter scenarios are not conducive to asset bubbles too! 

 

That said, massive bailouts via fiscal and monetary channels should inflame inflation too! 

 

What we are likely witnessing may be just one of the many in-your-face inflationary bear market rallies.  

 

Be careful out there. 

___ 

 

References 

 

Hyman P. Minsky, The Financial Instability Hypothesis, Levy Institute, May 1992