Asian telcos are carrying high levels of debt, including foreign currency loans, and could be exposed if the economy suffers a downturn, a Moody's rating executive has warned.
Laura Acres, senior vice president of Moody's Investors Service , says the industry is largely self-financing with a stable outlook, but that the high leveraging could be a concern in the future.
She says the ratio of free cashflow to debt has declined, while shareholder returns have increased, indicating that operators are "clearly focused on using free cash flow to pay shareholders rather than pay down debt."
Speaking at the TMT Finance & Investment conference in Hong Kong, she said that with "leverage embedded at high levels, people might start to think about M&A activity."
This wouldn't be a bad thing as long as the core business is functioning and operators are not borrowing to pay dividends. But there has been a lot of depreciation of Asian currencies during the past 12 months, and foreign currency as a proportion of debt runs as high as 80% among Asian operators, she noted.
Telcos might get accustomed to paying high dividends, Acres cautioned. "The big danger is they overpay and they get hit by a downturn... We believe it's manageable. Most operators have protections in place. We do see the risk as currently manageable, but we do see a note of caution," she stated.
Acres noted that, compared with Europe, the industry was in a strong position. Most Asian carriers are in an up-cycle, with the prospect of further growth to come. By contrast, virtually all European operators are in a down-cycle, according to a Moody's analysis.
She added that the industry is relatively self-financing, capable of meeting all its cash, maturing debt, and dividend commitments this year.
Acres noted that China Mobile Ltd. has the fourth-strongest balance sheet in the world, with US$70 billion in cash, while operators such as PT Telekomunikasi Selular (Telkomsel) , PT Indosat Tbk , and PT XL Axiata Tbk in Indonesia still enjoyed margins above 50%, some of the highest to be found anywhere.
— Robert Clark, contributing editor, special to Light Reading