These 5 Large Stocks Could Run Into Big Trouble If Interest Rates Rise

I was watching the evening news on Singapore’s Mandarin TV channel yesterday when an analyst was brought on to share some of his insights about the current situation with oil & gas services provider Swiber Holdings Limited (SGX: BGK)

For those of you unaware, Swiber’s management team had recently decided to shut down for business and place the company under judicial management. One of the big reasons for Swiber’s troubles is its heavy debt load – based on its latest financials (as of 31 March 2016), it has a net-debt to equity ratio of 194%.

The analyst on TV mentioned that the low interest rate environment the world found itself in over the last few years had induced Swiber to ramp up its borrowings. The data supports this view.

Swiber’s net-debt to equity ratio five years ago was a much lower (but still high) 112%. Meanwhile, the US’s central bank, the Federal Reserve, has kept benchmark interest rates there low – in fact, near zero – ever since the financial crisis erupted in 2008 (interest rates in Singapore are strongly linked to what happens in the US).

I currently have no smart views over what interest rates might do as it’s not something I factor too much into my investment decision making. But, the analyst’s comment got me thinking: What are some of the companies in Singapore’s stock market that may be most at risk of running into difficulties if interest rates start rising?

You may recall that the Federal Reserve raised the US’s benchmark interest rates for the first time in December last year after nearly a decade of not doing so.

To find out the answer, I ran a screen on Singapore-listed companies with a market capitalisation of at least S$1 billion to find the ones with the lowest operating-income-to-interest-expense ratios. My rational for the criterion is that companies with a low ratio are the ones with the least room for error in place to handle any possible interest rate hikes.

Without further ado, here are the five large cap companies with the lowest operating-income-to-interest-expense ratio in Singapore’s market: Sembcorp Marine Ltd (SGX: S51), Noble Group Limited (SGX: N21), Yoma Strategic Holdings Ltd (SGX: Z59), Perennial Real Estate Holdings Limited (SGX: 40S), and OUE Ltd (SGX: LJ3).

Sembcorp Marine, Noble, Yoma Strategic, Perennial, OUE, interest coverage ratio table
Source: S&P Global Market Intelligence

It’s worth mentioning that the quintet would not necessarily run into deep trouble in the future.

I’ve not looked through their businesses in too much detail. So, it’s possible that some – or even all of them – had incurred some big one-time operating expenses over the last 12 months that had pressured their operating income only temporarily. Or perhaps, it’s normal for them to clock low or negative operating income because of the way their business model functions.

See their low operating-income-to-interest-expense ratios as a yellow-flag and a call for a deeper study to find out if something’s indeed wrong, not as a sign that they are on death row.

If you'd like more investing insights as well as the latest news about Singapore's stock market, you can get both from The Motley Fool's free weekly investing newsletter, Take Stock Singapore. Written by David Kuo, Take Stock Singapore can help you grow your wealth in the years ahead. So, come sign up here.

The Motley Fool's purpose is to help the world invest, better. Like us on Facebook to follow our latest news and articles.

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing doesn't own shares in any companies mentioned.