Stock Rout Hits $2.4 Billion on Shock Manila Water Dispute

(Bloomberg) -- Philippine authorities looked to soothe investor fears as uncertainty over the capital’s water service contracts triggered a stock rout of more than $2 billion.

The government is “not thinking about” replacing Manila Water Co. and Maynilad Water Services Inc. as water concessionaires even as it seeks to renegotiate terms of their contracts, Justice Secretary Menardo Guevarra told reporters. The government plans to cut guarantees and increase oversight, Metropolitan Waterworks and Sewerage System chief regulator Patrick Ty said in an interview on Monday.

If talks fail, the government will need a court order to cancel the extension of contracts to 2037 from 2022, the Justice chief said. “Only then will we open the field to other competitors,” he said in Manila.

Manila Water, which sank as much as 46%, pared losses to 36% after Guevarra’s comments. The decline was still the steepest on record and brought shares to their lowest since 2005. DMCI Holdings Inc., a shareholder of Maynilad, closed 3% lower after dropping as much as 8%. Metro Pacific Investments Corp., which also owns Maynilad, rose 5%.

Wiped Out

The uncertainty has wiped out more than $2.4 billion from the market value of the water utilities and their parents. It is also a reminder of contract disputes and regulatory flip flops in the past that led companies from Fraport AG to Suez SA to leave the Philippines, and may threaten the country’s ability to compete with peers from Indonesia to Vietnam for investment.

“The government already agreed to the terms of the current contract, and now they want to change it,” said Lexter Azurin, senior analyst at AB Capital Securities in Manila. “That’s a big no-no for foreign investors.”

Negotiations will begin in January, according to Guevarra. Manila Water has said it’s more than willing to discuss issues in its contract.

Metro Pacific said in a disclosure on Monday that banks have stopped lending to Maynilad amid uncertainty over its concession. Maynilad expects to make 86% of its 34.7 billion pesos ($686 million) in loan repayments from 2023 onward, according to its latest annual report. A quarter of Manila Water’s 51.3 billion pesos in debt is due from 2023 onward.

New Deals

President Rodrigo Duterte has said he wants new deals signed with Manila’s two water providers after they sued the government for blocking tariff hikes. An international arbitration court ruled in their favor and ordered the Philippines to pay them 10.8 billion pesos in foregone revenue. Both Manila Water and Maynilad have since dropped their claims.

If negotiations fall through, the MWSS could “re-privatize” the water service, similar to what it did in 2007 when it bid out the Maynilad contract after Benpres Holdings Corp. and France’s Suez SA filed for rehabilitation, Ty said.

“There is a template that we can use already. All the creditors were paid. It shouldn’t be a cause for concern for any of the investors,” he said. “We have done this before, and we can do it again.”

According to Ty, the government wants to scale back “protections” granted to concessionaires and empower the regulator to penalize them when they fall below performance benchmarks.

Under the original contract signed in 1997, performance guarantees and a “long” 25-year concession period were likely needed to lure companies to join what was then the world’s largest water privatization effort, but they are unnecessary today, he said.

--With assistance from Andreo Calonzo and Clarissa Batino.

To contact the reporters on this story: Claire Jiao in Manila at cjiao5@bloomberg.net;Cecilia Yap in Manila at cyap19@bloomberg.net

To contact the editors responsible for this story: Cecilia Yap at cyap19@bloomberg.net, Lianting Tu, Karl Lester M. Yap

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