PHL ranked among laggards in governance, ESG

The Philippines has kept the 11th spot but at a lower overall score in a ranking of 12 Asia-Pacific countries on their performance in corporate governance (CG) and environmental, social, and corporate governance (ESG).

The 2023 CG Watch biennial survey by nonprofit association Asian Corporate Governance Association (ACGA) showed that the Philippines maintained its previous ranking in 2020, besting only Indonesia. The survey looked into the countries’ market performance and practices.

According to the report, the Philippines scored 37.6 in the 2023 ranking, down from a score of 39 in 2020, citing the country’s policy focus being “elsewhere” and the securities regulator’s “lacks resources.” 

Australia secured the top spot with a score of 75.2, followed by Japan at 64.6, Singapore at 62.9, Taiwan at 62.8, Malaysia at 61.5, India at 59.4, Hong Kong at 59.3, Korea at 57.1, Thailand at 53.9, and China at 43.7. 

The rankings were based on seven categories, namely: government and public governance; regulators on funding, capacity building, and reform, and enforcement regulators; corporate governance rules; listed companies; investors; auditors and audit regulators; and civil society and media. 

ACGR data showed that the Philippines scored higher in categories such as government and public governance at 29 versus 28 in 2020; CG rules at 48 from 45; investors at 25 from 21; and auditors and audit regulators at 62 from 60. 

However, the country scored lower in terms of regulators at 25 from 27; listed companies at 48 from 55; and civil society and media at 33 from 36. 

“Our goal in CG Watch is to give a diagnosis of the health of CG systems across APAC (Asia-Pacific). More than 20 years after the Asian Financial Crisis there is no doubt that most of the region is in better shape. We hope our scores and rankings help each market to pinpoint next steps for improvement,” ACGA Secretary General Jamie Allen said. 

Meanwhile, a separate survey done by Hong Kong-based capital markets and investment group CLSA Ltd. showed that the Philippines ranked last among the 12 APAC countries in terms of the CLSA CG score. 

The Philippines came out with a score of 49.3 in the 2023 CLSA CG ranking, lower than the 50.5 score in 2020. 

“Our analysis of CG scores by thematic characteristics revealed that gender-diverse firms have the highest CG scores, followed by privately-owned enterprises, large caps and manager-run companies; while state-owned firms score the lowest,” CLSA said.

CLSA reveals CG winners and losers by sector and examines CG scores by corporate characteristics as well as CG’s relationship with broader ESG scores and shareholder value creation.

“The Asian region is characterized by extreme weather events, shifting demographics and geopolitical uncertainties. Now more than ever it has become increasingly crucial to comprehend the connection between effective corporate governance, ESG, and shareholder returns,” CLSA Head of Sustain Asia Research Seungjoo Ro said. 

Sought for comment, SEC Commissioner McJill Bryant T. Fernandez said via Viber message that the regulator has been consistent in promoting corporate governance and protecting minority investors, through policies and regulations consistent with international best practices.

“This can be attested by, among others, the recognitions from both domestic and international bodies, as well as engagements with stakeholders here and abroad,” he said.

He added that the SEC “was neither consulted nor interviewed” about the report.

“To be circumspect, the Commission will go over the entire report and commits to provide substantive comments thereon soonest,” he said.

Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said that greater emphasis on ESG compliance is needed since it has been linked to good business practices. 

“Global and local regulators have already encouraged compliance with ESG standards for both issuers and investors even before the pandemic, which somewhat disrupted business, market, and other economic activities,” Mr. Ricafort said in a Viber message. 

“There should be greater emphasis on ESG compliance as this has become one of the important considerations by foreign investors in recent years, as ESG compliance is tied to good business practices,” he added.

Mr. Ricafort added that corporate regulators should have more funding to support more ESG compliance initiatives.

“More funding is needed to bankroll more ESG compliance initiatives amid limited financial resources of the government due to budget deficits especially since the pandemic,” Mr. Ricafort said.

Source: Business World

Leasing for Corporations

What are the usual forms of leases?

• Private land leases

• Public land leases

• Office/retail space leases

• Residential leases

Are lease provisions regulated or freely negotiable?

Except for (i) leases of public land and (ii) leases of land by foreign investors under the Investors’ Lease Act, lease provisions are generally not regulated and are freely negotiable.

Is there a maximum term for leases? Can these be extended?

Lease of private land to Philippine citizens and corporations that are at least 60% owned by Philippine citizens, as well as lease of any other type of real property (except public land) to Philippine citizens, foreigners and foreign-owned corporations, can have a term of as long as 99 years. As a rule, lease of private land to foreigners and foreign-owned corporations can have a maximum term of only 25 years, renewable for another 25 years upon mutual agreement of the landlord and tenant. However, a lease under the Investors’ Lease Act may have a period of 50 years, extendible once for a period of not more than 25 years. A lease under this law must be registered with the Department of Trade and Industry’s (DTI) Board of Investments and is subject to the following conditions:

• A stipulation as to the purpose of the investment for which the long-term lease agreement is being entered into

• A stipulation by the parties recognizing the unequivocal authority of the secretary of the DTI to terminate or cancel the long-term lease agreement:

  • if the investment project is not initiated within three years from the signing of the lease agreement;

  • in case of withdrawal of approved investment;

  • in case of use of the leased area for purposes other than that authorized by the DTI; or

  • in case of violation by the parties of any of the provisions of the Investors’ Lease Act and its implementing rules and regulations.

What are the usual lease terms?

Except for (i) leases of public land; and (ii) leases of land by foreign investors under the Investors’ Lease Act, lease provisions are generally not regulated and are freely negotiable. A lease agreement would typically include the following terms:

• Term/period of the lease

• Amount of the rent (and whether the same is inclusive or exclusive of value-added tax) and schedule for its payment

• Authorized use of the leased premises

• Which party shoulders the real property tax, association dues (if any) and documentary stamp tax

• Which party is responsible for the payment of water, electricity and other services and utilities used in or for the maintenance of the leased premises

• The respective obligations of the parties with respect to maintenance and repairs

• Whether the tenant is authorized to make changes and alterations to the leases premises

• Insurance

• What happens in the event of government expropriation, force majeure, etc.

• Grounds for termination of the lease agreement

• Representations and warranties of each party

Are there instances where tenants may demand an extension of the lease? No. However, an implied new lease will set in for the periods provided under the Civil Code when the following requisites are found to exist: (a) the term of the original contract of lease has expired; (b) the landlord has not given the lessee a notice to vacate; and (c) the tenant continued enjoying the thing leased for fifteen days with the acquiescence of the landlord.

On what grounds may a lease be terminated?

Lease provisions (including the ground for termination) are generally not regulated and are freely negotiable. A lease agreement would typically provide the following grounds for the landlord’s termination of the lease:

• Tenant’s breach of the terms of the lease agreement

• Tenant’s insolvency, bankruptcy, etc.

• Tenant’s abandonment of the leased premises

Must rents be paid in local currency?

The parties may agree on the currency in which rent shall be paid. In the event that rent is paid in foreign currency, the parties will usually agree on the exchange rate to be used for purposes of computing the applicable taxes.

Is rent paid on a monthly basis? Is it required to be paid in advance?

This will depend on the agreement of the parties. Depending on the type of property involved (land, or residential, commercial or office space, etc.), rent is usually paid monthly or quarterly, at the beginning of the month /quarter (as the case may be). In addition, it is common for the landlord to require the payment of advance rent equivalent to three months’ rent to be applied to the first three months of the lease term.

How is rent reviewed? Are there limits to the increase in rent?

Rent is usually fixed for the initial term. Rent for renewals or extensions may also be fixed or may be adjusted to reflect the market value at the time of renewal or extension. A maximum allowable annual percentage increase in rent is fixed for certain residential leases.

What are the basic obligations of landlords and tenants?

The following are usually required of landlords:

• Unless otherwise prevented by force majeure, maintain the tenant in peaceful possession of the leased premises for the entire lease term

• Repair and maintain the following in good order, condition and repair: (a) the foundations, exterior walls and roof of the building; (b) the electrical, mechanical, plumbing, heating and air conditioning systems, facilities and components located in the building which are concealed and used in common by all tenants; and (c) the common areas

The following are usually required of tenants:

• Pay rent on time

• Use the leased premises only for the purpose/activity specified in the lease agreement

• Keep and maintain the leased premises (including all non-structural interior portions, systems and equipment; interior surfaces of exterior walls, interior moldings, partitions and ceilings; and interior electrical, lighting and plumbing fixtures) in as good order, condition and repair as they were on the start of the lease period — reasonable wear and tear and damage from fire and other casualties excepted

• Obtain landlord’s consent before making any alterations, additions or improvements involving either the structural, mechanical, electrical, plumbing, fire/life safety, heating, ventilating or air conditioning systems of the leased premises

• Ensure that all alterations are constructed in a good and workman-like manner and in compliance with all applicable laws

What provisions or restrictions typically apply to the transfer of the lease by the tenant? May a tenant sublet the leased premises?

Unless the lease agreement provides otherwise, the tenant must obtain the consent of the landlord before assigning his rights under the lease agreement to another person. Unless the lease agreement contains a prohibition, the tenant may sublease the leased premises, in whole or in part, without prejudice to his/her responsibility for the performance of the lease agreement toward the landlord.

What happens in the event of destruction of the leased premises? Unless the lease agreement provides otherwise, the following apply:

• If the lease premises is totally destroyed by a fortuitous event, the lease is terminated

• If the destruction is partial, the tenant may choose between proportional reduction of rent and a rescission of the lease

Who is usually responsible for insuring the leased premises?

The landlord is usually responsible for insuring the leased premises.

Will the lease survive if the owner sells the leased premises?

No, it will not, unless (a) the lease of land is registered (i.e., annotated on the certificate of title covering the land) and the sale occurs subsequent to such registration, (b) there is a stipulation to the contrary in the contract of sale, or (c) the purchaser knows of the existence of the lease.

Will the lease survive if the leased premises are foreclosed? If the lease of land is registered and the mortgage of the land was annotated subsequent to the annotation of the lease, then the lease will have to be respected by the buyer in the foreclosure sale.

Source: Guide

Asia Must Monitor Rising Corporate Debt Amid Higher Interest Rates

Elevated borrowing costs are adding to risks that some companies may default on their debt as central banks keep interest rates higher for longer to contain inflation

Asia’s increased borrowing in recent decades has augmented the region’s exposure to rising interest rates and heightened market volatility.

Borrowing by the region’s governments, companies, consumers, and financial firms is well above levels prior to the global financial crisis. In particular, industries that rapidly increased leverage while interest rates were low are now a key concern, especially in Asia. While we expect Asia’s growth to hold up, contributing two-thirds of global growth this year, central banks may keep rates higher for longer to tame inflation, and financial conditions may tighten further.

Highly leveraged companies face greater risk of default as monetary policies and financial conditions remain tight. Even with resilient economic growth, interest payments may exceed earnings as borrowing costs rise, reducing firms’ ability to service their debts.

As the chart below shows, corporate debt in Asia is concentrated in firms with low interest coverage ratios. When this ratio, a measure of how much corporate earnings can cover debt interest payments, is below or close to 1, a firm may become unable to service its debts.

As of mid-2022, 17 percent of Asia’s corporate debt was held by firms with interest coverage ratios below one, and another third in firms with interest coverage ratios between one and four.

China, India, and Thailand had greater concentrations of corporate debt in firms with interest coverage ratios below one, a level signaling susceptibility to default. The Philippines, Malaysia, and Hong Kong had large shares of debt in companies with coverage ratios just above one, which could potentially become susceptible to default with rising borrowing costs. Across the region, a common theme is that a significant share of firms in the property and construction sector have interest coverage ratios close to or below one.

Cash buffers built up in recent years can provide a temporary reprieve against increasing interest rates, but may prove insufficient if borrowing costs remain higher for longer. Across the region, cash holdings are generally lower in firms with low interest coverage ratios, which are already more exposed to rising borrowing costs; in India, Indonesia, and Vietnam, cash holdings of such vulnerable firms are especially low relative to interest costs, leaving them at risk of insolvency.

In addition, given high shares of short-term debt in Asia, even firms with ample stockpiles of cash may face severe pressures should credit conditions tighten and reduce availability of short-term loans.

Financial stability focus

The IMF monitors the evolution of these risks amid the prospect for higher for longer interest rate environment or a potential tightening of credit and financial conditions in the region. We recently visited the Philippines to join the central bank in hosting a conference on financial stability for Asia’s policymakers.

Our gathering in Cebu, on the sidelines of a Financial Stability Board–Regional Consultative Group for Asia conference, convened regional central bankers and regulators to discuss systemic risk issues in the region and how to address them amid global bank stresses. Regional corporate debt vulnerabilities were part of the discussion.

Financial supervisors must remain vigilant amid elevated uncertainty, high debt burdens, and rising debt service costs, and should recalibrate relevant macroprudential tools as needed to tackle pockets of vulnerability in the corporate sector. At the same time, central banks should separate monetary policy objectives from financial stability goals, using specialized tools such as liquidity and lending facilities to safeguard financial stability, while continuing to calibrate monetary policy to address inflationary pressures.

Source: IMF