How Asian companies are coping

Global Finance, Dec 1997/Jan 1998 by Arensman, Russ, Chavez, Gertrude

Restructuring may be in the wind for corporate Southeast Asia and Korea, but many companies there also have more immediate concerns. "The most important thing for all of us at the moment is to review cost structures, particularly foreign-denominated investment and expenditures," says Ralph Marshall, a director of Malaysian telecom and satellite operator Binariang. "It's still too volatile in the region for us to he able to make decisions as to how to go forward."

Unsettled conditions are clearly having a cautionary effect in Indonesia, where the Ometraco Group, a $1 billion agribusiness, banking, and manufacturing conglomerate is delaying new ventures until the dust settles. "A lot of new business-certainly in our case, expansions-are being put on hold," says Roberto Valdes, head of corporate finance for Ometraco Corporation. "We have a certain amount of cash, but do we want to invest this cash without really knowing when we'll be able to raise more, in case this thing drags on?"

Ometraco raised $300 million in the first half of 1997, nearly half of it from the sale of a pharmaceutical subsidiary to Indonesia's Tempo Group. The proceeds had been slated for expansion, he says, but now cash preservation has become a higher priority. "We reviewed our capital spending plans for 1998 and canceled 80-90% of them," Valdes says. "Any project that either was not essential or not very close to completion was basically canceled."

Besides reining in costs, Valdes says, he is paying close attention to assuring "asset quality"-making sure that customers can actually pay for their orders-as well as to reducing currency risks via hedging. Well before the turmoil, Ometraco took precautions against potential currency losses. "We were quite active in using derivatives for hedging but nowhere close to enough," he says. "We had situations where we were 80-90% hedged. But still, in hindsight, you now wish you were 100% hedged." And while the company's debts have remained stable in recent months at about $600 million, Valdes says, he is working with banks to roll over existing loans into longer-term agreements.

Reynolds Philippines, maker of aluminum foil and metal sheets, has been especially hit by the 33% devaluation of the Philippine peso against the US dollar, since 80% of its raw materials are imported. It has had to combine corporate restructuring with a few balance sheet adjustments to ease the impact of the financial crisis.

The company, with $31.25 million in sales in 1996, plans to "depreciate," or amortize the increase in foreign currency costs of a $27 million, six-year loan over the life of the loan when it restates them in pesos on its income statement, as Philippine law requires it to do. Ordinarily, the company would have treated them as a onetime loss.

Raymond Mercado, Reynolds finance manager, says the company is now recycling metal scraps purchased from local manufacturers as a substitute for imported metal. A separate company has been established specifically to recycle the metal scraps. "Right now, we use about 20-25% of these scraps for our products. If you go higher than 25%, the quality of the product suffers. We're trying to maximize the value of our imports," says Mercado.

Reynolds also is hedging long-term customer supply contracts by buying futures on the London Metal Exchange. "The idea is to preserve the value of the contracts," says Mercado. "World metal prices have been especially volatile."

Blue chip Philippine Long Distance Telephone derives 57% of its $835 million revenue in dollars from international calls, but it, too, is having to make some adjustments. Defense of the peso has driven Philippine interest rates from 12% in June to 30% in December, so PLDT is accelerating its efforts to improve efficiency in engineering, service provision and restoration, network support, and billing and collection and to cut staff 20%. "Two years ago, we had 15,000 employees, which I think is way too much," says Ricardo Tan, assistant vice president for investor relations. "This year we have cut jobs by about 2,500. As a result, our operating margins have improved to 40%."

-Russ Arensman and Gertrude Chavez