Stock market: P 127B lost after Duterte hits water firms

An estimated P127 billion worth of fortune has been wiped out of the stock market over the past eight trading days after Manila Water Co. and Maynilad Water Services Inc. incurred the wrath of President Duterte over what he called onerous provisions in their contracts, which jeopardized their operations beyond 2022.

Worst hit by the sell-off was businessman Manuel V. Pangilinan-led Metro Pacific Investments Corp. (MPIC), parent conglomerate of Maynilad, which lost P53 billion as stock prices tumbled 38.4 percent.

The worst drop was seen in the last two days, when MPIC’S shares fell 15.67 percent and 13 percent, respectively. Its share price closed at P2.69 per share on Thursday, down P1.68.

In terms of percentage decline, Manila Water suffered the most as share prices had slid 41.8 percent. Share prices closed on Thursday at P11.04 per share from P18.98 on Dec. 2, translating to a loss of P16.4 billion in market capitalization.

Manila Water’s parent conglomerate Ayala Corp. saw a more modest share price decline of 7.5 percent. Given Ayala’s large market capitalization, however, this decline cost it P39.52 billion.

Consunji family-led DMCI Holdings, for its part, suffered a 21-percent drop in value over the eight-day period, shaving off P17.93 billion in its market capitalization.

Jitters among banks

Nicky Franco, head of research at local stock brokerage Abacus Securities, estimated that the recent declines in the share price of four companies with interest in the water concessionaires gnawed on the equity position of state-run pension funds Social Security System (SSS) and Government Service Insurance System (GSIS) by almost P4 billion.

The government decision not to extend the concession contracts of Manila Water and Maynilad beyond 2022, as earlier agreed upon during the term of President Gloria Macapagal-arroyo, is seen to cause jitters among banks.

Manila Water alone has about P17 billion worth of debt owed to seven local banks.

“There are too many angles, lots of collateral damage and very poor visibility on what happens next,” Franco said.

Hans Sicat, chief executive officer at ING Philippines and a former president of the Philippine Stock Exchange, said there were two ways to look at this water row.

The first is that the regulators will not tolerate suboptimal operational performance, which was unfortunately what happened, he said.

“The flip side is on the cancellation of the extension. I think that they probably did not need to do that. You had enough remedies under any contract that the regulators could have hit the erring utility with,” Sicat said in an interview.

He said the government could have signaled that the water concessionaires would not increase tariffs or that parties responsible for the so-called onerous provisions would be penalized.

No continuity of contracts

“Because you will say: ‘How safe is my concession, or my contract, my cash flow, and if I’m not sure, then I will triple the premium or interest rates,’” he added. “So if you have a long-term loan to the two water concessions, suddenly your credit rationale is out of the window.”

[I]f you’re tying to look at this on a policy perspective, this [shows an] issue in the Philippines [that] you don’t have a continuity of contracts,’’ he said.

Sicat said political risk would then increase when you talked about administration change, which might affect some of the funding for future long-term projects.

Foreign direct investment

Another implication is on foreign direct investment (FDI), which is sensitive to discussions on increased political risk, Sicat said.

Since the start of the year, FDI to the Philippines has declined by 37 percent while net foreign selling in the stock market is close to $2 billion since the start of 2018. “Neither now is likely to recover anytime soon,” Abacus’ Franco said.

Justice Secretary Menardo Guevarra said the cancellation by the Metropolitan Waterworks and Sewerage System (MWSS) of the memorandum of agreement extending the concession contracts was upon the President’s directive, which was, in turn based on a Department of Justice (DOJ) recommendation.

Extension lacked basis

The DOJ found that the extension by 15 years of the 25year concession agreements had “no legal basis.”

“Up to this point, the concessionaires have never denied the existence of inequitable provisions in the water concession agreements. In fact, they have expressed their willingness to renegotiate. If this is so, what contracts are supposed to be extended till 2037? The old one expressly repudiated by the government and virtually admitted as flawed by the private concessionaires?” Guevarra said in a statement.

“If parties will renegotiate, what is there to extend?” he added.

Proper time

Guevarra noted that the proper time to renew the contracts was upon their expiration in 2022, “as expressly provided in the agreements themselves.”

While the concession agreements have provisions on the renewal of the contracts upon their expiration, and on early termination, he said “there are none on extension beyond the original period much less extend way before the original expiry date.”

“That’s why we’re sitting down with them for now. We’re not rejecting the entire contract, just repudiating the onerous provisions,” he said.