Rising Cost of Credit Hits Asian Companies
Asian companies are discovering that the cost of raising money in the region, especially in US dollars, has risen even for those with strong credit ratings while for junk-rated firms the credit markets have been almost totally closed since June.
While the severity of the problem varies across the region, the trend illustrates that just as Asia's economies have not decoupled from the west, neither have its capital and banking markets.
Given the uncertainty stalking the European and US markets, banks have less liquidity and the big investment houses hit by fund redemptions are pulling back from Asian bonds. The risk is that the lack of financing will erode economic growth, in turn deterring capital flows to Asia.
"There has been a visible re-pricing of liquidity in the markets," says Ronan McCullough, a managing director at Morgan Stanley in Hong Kong. "Spreads [relative to US Treasuries] have widened sharply. We haven't seen substantial issuance since the beginning of August. Asia is still hostage to international capital flows."
For example, Export-Import Bank of Korea came to market at the end of September, the first dollar borrower in many weeks. But despite its quasi-sovereign status, it paid almost two and a half percentage points over Treasuries for the $1 billion it raised - over a full percentage point more than it would have a few months earlier, dealers say.
The trend is somewhat unexpected. In the wake of the Asian financial crisis over a decade ago, governments in the region have run surpluses and built up mountains of reserves. Moreover, the level of foreign debt is a fraction of what it used to be and local banks are far better capitalised.
But dollars are now in short supply as deposits in the US currency slow. Many banks in the region, especially those from Europe and local lenders without a branch network to scoop up cheap retail deposits, have seen a surge in the cost of their dollar funding.
In Hong Kong, where renminbi deposits are increasingly favoured over dollars, local banks are forced to go into the wholesale market to fund their dollar loans, raising the cost of the money they lend out.
Asian companies are "more vulnerable to a higher cost of capital and they are also vulnerable to a drop-off in foreign direct investment," said Ashley Wilkins, deputy chief executive in Hong Kong for Société Générale.
Even if the immediate clouds surrounding the sovereign debt crisis in Europe disperse, higher regulatory capital provisions mean the state of affairs won't improve dramatically. Mr Wilkins says countries such as Australia and South Korea, where foreign banks supply more than 50 percent of total loans to domestic companies, according to data from Dealogic, may be hit especially hard.
Moreover, spooked by the current global market volatility, many new deals are finding few takers. Both European and US investors have dumped the debt of Asian companies, in part because it is far from home and in part because they are facing redemptions. Meanwhile, there are still relatively few domestic Asian investors to hold that debt through the cycle.
However, investors and bankers say it would be an exaggeration to call the current situation a credit crunch. Many companies in Asia have stockpiles of cash, and most are for now eschewing bold expansion plans that require borrowed money.
"There is a game of chicken," says Dominique Jooris, head of Asia Pacific ex-Japan Investment Grade Capital Markets and Hybrid Capital at Goldman Sachs. "Investors are trying to extract a premium and the issuers are holding off non-critical issuance."
But the situation could take a turn for the worse if China maintains its tight money policy. Until recently, Chinese companies could turn to Hong Kong for the funds they were denied at home, by putting money in domestic branches to borrow against in Hong Kong, or by tapping international banks with guarantees from mainland lenders. Regulators are now clamping down on such arrangements.
"It is an open question how Asia will fund itself going forward," says the head of Hong Kong for one major international bank. "Regulation is discouraging lending. Many lenders are pulling out. And China can eat into all the liquidity in the region."