MANILA, Philippines -- The ongoing controversy over the aborted ZTE broadband contract must be giving the jitters to executives of local companies that have substantial foreign loan obligations.
Their credit rating could be adversely affected by an impression of political instability in the country.
When a company borrows from abroad, it is standard practice for the prospective creditor to require it to undergo examination by a credit rating agency to determine its credit worthiness.
The top three international rating agencies are Moody?s Investors Service and Standard & Poor?s of the United States and Fitch Ratings, which is dual- headquartered in New York and London.
The agency?s task is to evaluate the borrower?s ability to repay a loan in accordance with the terms of the loan agreement.
The perceived capacity or incapacity to pay, in turn, influences the decision on the interest to be imposed and the schedule of payment of the principal.
If the company?s business fundamentals look good, the interest rate and lending conditions would usually be within the range that the lender gives to similarly situated borrowers.
A borrower that appears to have the makings of a bad debtor will find difficulty getting a loan and, if it does, would have to contend with high interest rates and tough payment terms.
Strict review
First-time borrowers literally go through a wringer when it undergoes a credit or due diligence review.
The reviewers consist of accountants, lawyers and experts in the business that the borrower is engaged in.
Ahead of their arrival, they require the preparation and submission of all documents that track the company?s operations within, say, a five-year period.
The checklist covers audited financial statements, permits and licenses, reports filed with regulatory agencies, bio-data of the top executives and all other documents that could affect the company?s credit standing.
After going through the files, the agency interviews the company?s key executives, external auditors and lawyers to validate the facts and figures earlier submitted and look for possible skeletons in the company?s closet.
The confidentiality rule is not observed in credit reviews. Everything and anything that the examiners may ask for has to be submitted immediately.
A refusal to turn over the requested documents could give the impression that the company is hiding something or is less than candid in its dealings with the lending institution.
The examiners can (and will) ask all kinds of questions to satisfy themselves about the company?s credit worthiness or lack of it.
And that includes inquiries into the lifestyle of the management staff to make sure the loan amount is used for legitimate business purposes, not to pay for extravagant social activities.
Environment
Since the borrower?s business cannot live in a vacuum, the social, economic and political environment in which it operates also forms part of the review process.
Does the target market have the earning capacity that can sustain the viable operation of the business?
Are there sufficient foreign exchange reserves in the country?s coffers to meet external debt obligations?
Are the political institutions operating in accordance with the Constitution?
The borrower may be the most profitable business in the country, but no foreign lender worth its salt would lend it money without the assurance that the terms of the loan will be honored by the borrower and its government.
Based on the credit rating given to the borrower, the lender then decides whether to grant the loan requested and, if so, under what terms and conditions.
But one thing is sure, regardless of the outcome of the credit review, the expenses incurred by and the professional fees of the agency (which are often staggering) are for the borrower?s account.
Periodic review
If the initial credit review is favorable, the succeeding evaluations, if any, would generally be less tedious.
For loan agreements that provide for variable interest rates, i.e., the rate is not fixed and depends on the value of another financial benchmark, such as US Treasury bills, the credit review is a continuing activity.
The ?interest rate setting process,? as it is commonly called, requires the borrower to undergo a credit review on preset periods or if certain events arise to determine whether the current interest is commensurate to the credit standing of the borrower.
Thus, in case of adverse developments in the borrower?s operations, or certain political events threaten its ability to meet its loan obligations, the rating agency may suggest an increase in the interest rate.
When affirmed by the lender, the recommended interest becomes controlling until the next interest rate setting period kicks in.
Does that mean the interest rate will be reduced if the borrower maintains its financial health and the operating environment continues to be favorable?
No. Interest rates only go sideward or upward. The laws of gravity do not apply to Shylocks.
For feedback, please write to rpalabrica@inquirer.com.ph.
Previous columns:
Neighborhood groups ? 2/22/08
Choice of words ? 2/15/08
Registration ?feng shui? - 2/08/08
Disclosure vs approval ? 02/01/08
Scripophily ? 1/25/08
Revoked corporate papers ? 1/18/08
Investors protection fund ? 01/11/08
New reporting rules ? 01/04/08
